Understanding SAFEs and priced equity rounds
29 Mar 2023
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lecture
Tools
Definition
- Simple Agreement for Future Equity
- investor gives money now for a promise to give shares on a
priced round
Things to negotiate on?
- amount of money
- valuation cap
- amount / valuation cap = guaranteed ownership even if company
raises more
Difference with debt?
- debt has an interest rate
- debt needs to be repaied
Anatomy
- Section 1: events
- Equity financing
- Liquidity event
- Dissolution
- Liquidation priority
- who comes first to be repaid
- Termination
- SAFE terminates if something above happened
- Section 2: definitions
- Section 3: company representation
- company represented correctly
- Section 4: investor representation
- Section 5: legal boilerplate that has to be there
Post-money
- after all the safes
- pre-money valuation + money raised = post-money valuation
- amount raised / post-money valuation cap = ownership
Other different saves
- discount instead of valuation cap
- e.g. 20% discount on shares in priced round
- uncapped SAFE
- just the ability to get shares on priced round at the same price
as investors
- unpopular
- uncapped with “Most Favored Nation”
- don’t agree on cap right now
- if other investors are investing I get the best deal among
those
On priced round ($5M invested on $15M pre-money) 3 thing
happen
- safes convert
- On new rounds we do not transfer our shares but we create new
shares
- When SAFE convertes, we dilute current shares by multiplying
ownage percentage by (1 - investor ownership)
- 5% and 10% based on the valuation in the cap (if a priced round
is higher than cap in the SAFE)
- if a priced round is lower it means that investor will have
higher percentage
- so if a cap is really high (e.g. $10M and they put $100k, they
would normally get 1%) but if you raise later on $5M valuation it
converts to 2%
| Founders |
9,250,000 |
|
78.625% |
| Options Issued |
650,000 |
|
5.525% |
| Options
Available |
100,000 |
|
0.85% |
| SAFE Investor
A |
|
588,235 |
5% |
| SAFE Investor
B |
|
1,176,470 |
10% |
| Total Issued |
10,000,000 |
11,764,705 |
100% |
option pool is increased
- increase option pool for future employees
new inverstor invest
- Capitalizations = total fully-diluted share after SAFE
conversion and the option pool increase)
- 10M + 1.76M (SAFEs convert) + 1.695M (option pool increase) =
13.455M
- Price per share = Pre-money Valuation / Capitalization
- $15M / 13.455M shares = $1.114
- Number of shares = investment amount / Price per share
| Founders |
9,250,000 |
|
51.54% |
| Options Issued |
650,000 |
|
3.62% |
| Options
Available |
1,794,558 |
|
10% |
| SAFE Investor
A |
|
588,235 |
3.28% |
| SAFE Investor
B |
|
1,176,470 |
6.56% |
| Lead Investor |
|
3,589,136 |
20% |
| Other
Investors |
|
897,284 |
5% |
| Total Issued |
11,694,558 |
6,251,125 |
100% |
- don’t overoptimize on caps
- negotiation is hard and effect is not that large
- $800k on $10m vs $8m post-money cap: founders own 52.77% instead
of 51.54%
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