This is a great option. It's about time!
Announcing the Safe, a Replacement for Convertible Notes
21–30 of 118 posts
Re: Announcing the Safe, a Replacement for Convertible Notes
#22I like this. Instruments that look like debt (terms and interest rates) generally are the instruments of lower risk investors. Linking them to equity is the game of wall street arb desks. Turning the instrument into a warrant is more in lines with high stage early equity investing - giving folks an option on a potentially large upside.
Re: Announcing the Safe, a Replacement for Convertible Notes
#23Will YC VC use these in the upcoming batch?
Yes, the YCVC investments this batch are going to be on safes instead of notes.
So, since there is no qualifying event, investors could get stuck without any ownership for a while. for YC this is most likely a non-issue, but most other investors won't be able to, thus providing YC with a bit of extra edge in attracting great entrepreneurs. Fair assessment ?
Re: Announcing the Safe, a Replacement for Convertible Notes
#24This looks good to me, as long as it's enforceable (as in the state sees it as a valid, binding contract). It's still debt until it converts as far as I can tell, which is the only way I know of to give the company money today for securities that don't exist yet.
Re: Announcing the Safe, a Replacement for Convertible Notes
#25Earlier quoted context omitted.
Yes, the YCVC investments this batch are going to be on safes instead of notes.
So, since there is no qualifying event, investors could get stuck without any ownership for a while. for YC this is most likely a non-issue, but most other investors won't be able to, thus providing YC with a bit of extra edge in attracting great entrepreneurs. Fair assessment ?
Not necessarily. The 'caps' on these warrants are likely to be lower to compensate investors.
Re: Announcing the Safe, a Replacement for Convertible Notes
#26So as I understand it, investors want priority over equity holders in the event of a liquidation, but without the regulation and potential tax headaches of debt.
Since [convert] = [bond] + [option] what we do is make [bond] pay no coupon, and strike the option weirdly and make it look like it is a new (disruptive?) form of investment, when really it's tax/regulatory arb.
Caveat: I am not a lawyer or banker, nor have actually read the documents, though I did read the OP.
Re: Announcing the Safe, a Replacement for Convertible Notes
#27I'm an entrepreneur, so it all sounds great for me, but why would investors go for this? It seems like they give up a lot of down-side protection: (1) No ability to convert or abort in the absence of a QFE, (2) no more first creditor protection -- if the company goes under, but also has outstanding loans, investors don't participate in a share of the liquidation proceeds as they would as debt holders (3) no interest = less equity at conversion? Am I wrong here? What am I missing? Thanks YC for your ongoing efforts!
Re: Announcing the Safe, a Replacement for Convertible Notes
#28This is an example of one of the key things that sets YC apart from every other early stage investor. Like the startups they fund, they constantly improve their "product" to make something entrepreneurs want.
YC, with its clout, is probably the only entity that could push something like this through.
Re: Announcing the Safe, a Replacement for Convertible Notes
#29I'm an entrepreneur, so it all sounds great for me, but why would investors go for this? It seems like they give up a lot of down-side protection: (1) No ability to convert or abort in the absence of a QFE, (2) no more first creditor protection -- if the company goes under, but also has outstanding loans, investors don't participate in a share of the liquidation proceeds as they would as debt holders (3) no interest…
I'm assuming that the theory here is that the good investors are more concerned about being in on the next Snapchat or Airbnb, and a lot less interested in bolstering downside protections that only apply if an investment is going to be one of the unproductive ones anyways.
Meanwhile, the good companies aren't going to be likely to entertain financing on anything but terms like these, so fighting them just incurs an adverse selection penalty.
The same thing seems to have happened with convertible debt, which was preceded by financing mechanisms that were way, way more onerous for entrepreneurs.
Re: Announcing the Safe, a Replacement for Convertible Notes
#30"the preferred stock that a SAFE holder is issued will have a liquidation preference that is equal to the original SAFE investment amount, rather than based on the price of the shares issued to the investors of new money in the financing. "
This point is incredibly important and one of the key downsides of debt from the company perspective, as convertible notes create outsized liquidation preference upon conversion. And when things don't go as well as you hoped, liquidation preference matters a ton.
Kudos PG et al. EXCELLENT work.