Ask HN: Paper capital contributions as YC SAFE that converts to common stock? • Hacker News Board

Re: Ask HN: Paper capital contributions as YC SAFE that converts to common stock?

#11

Post by systemaccount » Sat, Apr 11, 2020, 2:34 AM UTC

hdmoore wrote: post #9

systemaccount wrote: post #7

Earlier quoted context omitted.

Great feedback. We were leaning equity over debt because many articles claim investors dont like seeing debt on the books. Had you considered a contingency plan if you couldn't pay yourself back or had to reduce debt? For example: call it a bad loan and each founder would write it off.

On the investor front it depends on the debt size. Most seed-stage investors would prefer debt to a competing investment amount. Loaning yourself up to a year of lean run-rate is probably fine, but much more (hiring, paid user acq, etc) is going to look weird. Future investors may ask you to write off the loan entirely if the terms are nuts (compounding or high interest rate), but shouldn't bat an eye otherwise. Rega…

This is extremely helpful. Thank you for your insight.

Re: Ask HN: Paper capital contributions as YC SAFE that converts to common stock?

#12

Post by dustingetz » Sat, Apr 11, 2020, 2:40 AM UTC

systemaccount wrote: post #8

dustingetz wrote: post #6

how much money are we talking about and how much time since incorporation? and what will the money be used for?

Incorporated last month and want to make the first deposit ASAP. We plan to transfer 1K a month from our personal savings for the next year (or until its no longer needed) to cover basic operating expenses, like hosting. We both still have day jobs.

maybe get a credit card for the business and split the bill each month?

Re: Ask HN: Paper capital contributions as YC SAFE that converts to common stock?

#13

Post by dustingetz » Sat, Apr 11, 2020, 2:56 AM UTC

systemaccount wrote: post #8

dustingetz wrote: post #6

how much money are we talking about and how much time since incorporation? and what will the money be used for?

Incorporated last month and want to make the first deposit ASAP. We plan to transfer 1K a month from our personal savings for the next year (or until its no longer needed) to cover basic operating expenses, like hosting. We both still have day jobs.

so if YC takes 7% seed round takes 23% esop 10, series A takes 25% for 8M$ which is your first priced round and the safes convert, so assuming no angels or friends & family round, VCs have 45 esop 7-10% after dilution, founders splitting 45 so 22% each, so the special $20k safe for bootstrapping costs will convert at 5M cap or something so we’re talking about a balance of 20k/5M = .4% or something ... just get a credit card

Re: Ask HN: Paper capital contributions as YC SAFE that converts to common stock?

#14

Post by dcaisen » Sat, Apr 11, 2020, 3:54 AM UTC

systemaccount wrote: post #10

dcaisen wrote: post #5

Not sure if it's the optimal approach, but this is pretty much exactly what we did. At the onset of the company, I made a capital contribution (beyond the small purchase amount of our founder stock) using a standard YC SAFE with no valuation cap/discount (with an MFN clause). When we later raised a friends and family round, we did so via a SAFE as well, this time with a valuation cap, and I swapped my initial SAFE fo…

Regarding the part that's unclear - my understanding is that investors prefer founders own common over preferred stock which is why I proposed our founder SAFEs convert to common while all others to preferred. From your experience it sounds like all SAFEs, including the founders, will convert to preferred. Thanks for clarifying that ESOP is common stock. In the SAFE guide its unclear where this belongs. I admit I sti…

When you start the company, you and your co-founders purchase all of the common stock at a de minimis price (and file 83(b) elections!).

The additional preferred shares you would get when this SAFE is converted will almost certainly be very very small compared to your original founder stake - to the point where it's kind of pointless to get it in the first place. Your investors wouldn't want your initial founder equity to be preferred, but they should have no problem with you putting in your own additional money alongside theirs on the same terms. Many investors like to see their founders have skin in the game.

From the founder's perspective, you're better off making a loan to the company, since you're already so rich with equity. That said, in my experience, investors don't like putting money in just to have the founders take money off the table, especially early on. With my first company, we started off with founder loans, and when we raised our first institutional round, our investors insisted we convert those loans into equity at their same price as opposed to paying ourselves back.

That's why my approach with this second company was to go straight with the SAFE off the bat for my capital infusion.

It is possible that our first company was an anomaly - and that founders putting in additional capital via loans is the standard practice and that most investors are totally cool with you getting paid back on those loans.