So did YC just invent private equity options?
Announcing the Safe, a Replacement for Convertible Notes
11–20 of 118 posts
Re: Announcing the Safe, a Replacement for Convertible Notes
#12Re: Announcing the Safe, a Replacement for Convertible Notes
#13Anybody know how this compares to convertible equity schemes, like [1], which made front page last summer in a few stories?
[1] http://techcrunch.com/2012/08/31/thefunded-founder-institute...
Re: Announcing the Safe, a Replacement for Convertible Notes
#14Q: What happens if the startup does well after the safe and doesn't need to raise any money and doesn't have a liquidity event? Are the safe investors stuck with a security which does not derive any economic (e.g., dividends) value and they don't have any control?
From the documents, it appears that the holder has the option to get money back, or shares in the event of a merger/acquisition. They also have priority rights over shareholders in the event of a dissolution.
So no, they DO derive economic benefits, but it may be a long time coming.
[Edit: this is almost the same as convertible notes. The only difference is that as a debt holder they may be able to force a resolution at maturity, but that is usually to the detriment of the company. But as the preamble says, most angel/VC investors dont actually want to be a debtholder"
Re: Announcing the Safe, a Replacement for Convertible Notes
#15Q: What happens if the startup does well after the safe and doesn't need to raise any money and doesn't have a liquidity event? Are the safe investors stuck with a security which does not derive any economic (e.g., dividends) value and they don't have any control?
Convertible notes convert into equity (either at the holder's or issuer's option) on the QFE - a Qualifying Financing Event. Often that also includes certain revenue threshholds and/or time limits. Does the "safe" have provisions for this?
but in the worst case with the convertible note, the investor gets their money back.
and often but not always, the note will also provide that if the note matures hasn't been a QFE, then the note can convert into common stock.
Re: Announcing the Safe, a Replacement for Convertible Notes
#16So, based on the writeup, it's just an option? And this didn't exist already? It seems so obvious in retrospect it's surprising no one had thought to do this. Is there anything special that makes this substantially different from a vanilla option, or is it just that a Safe is standardized in an easy to use way?
An option, strictly speaking, has an underlying security that already exists. The Safe, like a convertible note, doesn't have an underlying security yet, since the company hasn't created the preferred stock that it would convert into yet.
Re: Announcing the Safe, a Replacement for Convertible Notes
#17Very interesting! Sounds like a really good thing for YC members.
So if a company manages to get to a pre-IPO stage, will the accounting for these warrants be more complex? It sounds like trying to value one of these warrants might add some/a lot of extra work.
Re: Announcing the Safe, a Replacement for Convertible Notes
#18Re: Announcing the Safe, a Replacement for Convertible Notes
#19So, based on the writeup, it's just an option? And this didn't exist already? It seems so obvious in retrospect it's surprising no one had thought to do this. Is there anything special that makes this substantially different from a vanilla option, or is it just that a Safe is standardized in an easy to use way?
An option, strictly speaking, has an underlying security that already exists. The Safe, like a convertible note, doesn't have an underlying security yet, since the company hasn't created the preferred stock that it would convert into yet.
Well, sort of. In a broad sense an option is simply an irrevocable right to acquire or do something, without an obligation to actually acquire or do it. You can write options for whatever you'd like, despite securities being the most common use.
You're right about securities; the security usually exists prior to offering a contract on it. But even then it gets a little more complicated. For instance, I can write a naked option (an option to buy a security I don't even own). They're pretty flexible instruments, and I'm not sure how Safes are substantially different. That having been said, it sounds great for founders and funders, since it's far simpler than the alternatives, and I'm shocked no one has thought to do this before. Kudos to the YC folks for having the insight to set it up.
Re: Announcing the Safe, a Replacement for Convertible Notes
#20Very interesting! Sounds like a really good thing for YC members. So if a company manages to get to a pre-IPO stage, will the accounting for these warrants be more complex? It sounds like trying to value one of these warrants might add some/a lot of extra work.
Just like a convertible note, as soon as there is an equity financing the Safe would just "convert" into a class of preferred stock. So you wouldn't have the valuation problem after you do a first financing, if I understand correctly.