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Announcing the Safe, a Replacement for Convertible Notes

blog.ycombinator.com

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Re: Announcing the Safe, a Replacement for Convertible Notes

#111

Post by danshapiro »

clevy wrote: post #105
danshapiro wrote: post #65

Two questions: - in the acquisition of a company with an MFN SAFE, it says that the instrument can convert in to common at the fair market value of the stock. Isn't that the FMV the purchase price? So isn't that the same as getting your original money back (no matter how successful the company may become)? Regarding pro rata rights it says: Do SAFE holders get pro rata rights? This pro rata right must be in either th…

Re question 1: you read correctly. An investor just get its money back in a change of control. An investor using this form of safe would have to be very confident that the safe would be amended to match a later safe with better terms. To be perfectly honest, this form of safe may not be very popular for this reason, but uncapped notes with an MFN clause have been popular, so we decided to have a safe like that too. R…

Aha. It seems odd then to say that there are two choices in the case of MFN conversion, when they amount to the same thing.

I know YC has seen MFN usage in the "everyone gets $100k" scenario, but I also could see them useful for family and friends rounds where an unsophisticated investor with a conflict of interest wants to put in the first $10k but not set a price. In that case, a default conversion might make sense as an option.

Re: Announcing the Safe, a Replacement for Convertible Notes

#113

Post by syedkarim »

JackFr wrote: post #26

So 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…

I don't think anyone is claiming it to be truly innovative and disruptive, as it's basically a warrant. But that doesn't take away from the value that the Safe creates, which is a standardized and well-thought out legal instrument that is freely available and modifiable.

Re: Announcing the Safe, a Replacement for Convertible Notes

#114

Post by syedkarim »

rexreed wrote: post #102
amattn wrote: post #90

Earlier quoted context omitted.

Doesn't a discount align the incentives better? Is there active resistance to discounts in the investor community? Among angels at least, I personally haven't seen it...

A discount without a cap is certainly better than a discount with a cap from the founder's perspective, but the investors and founders are still at odds because a founder would want the valuation at conversion to be as high as possible so that the new investor's dollars are converted at the lowest equity stake possible. But when that happens, the early investors dollars are worth a lot less in terms of equity in the…

Isn't a set-price, as opposed to a discount, the simplest way to align everyone's interests immediately and cheaply?

Re: Announcing the Safe, a Replacement for Convertible Notes

#115

Post by rexreed »

syedkarim wrote: post #114
rexreed wrote: post #102

Earlier quoted context omitted.

A discount without a cap is certainly better than a discount with a cap from the founder's perspective, but the investors and founders are still at odds because a founder would want the valuation at conversion to be as high as possible so that the new investor's dollars are converted at the lowest equity stake possible. But when that happens, the early investors dollars are worth a lot less in terms of equity in the…

Isn't a set-price, as opposed to a discount, the simplest way to align everyone's interests immediately and cheaply?

Sure, but that means setting a valuation. Price = valuation.

Re: Announcing the Safe, a Replacement for Convertible Notes

#116

Post by md2be »

grellas wrote: post #74

A few thoughts (apologies up front for the somewhat longish technical aspects of the discussion): 1. YC has once again managed to innovate in fascinating ways that help promote startups. And, it should be said, the legal work behind formulating this instrument called a "safe" is both sophisticated and commendable. It is at once simple and subtle and it covers a lot of nuanced legal technicalities that must have requi…

This strategy is not exactly novel. In the world of Structures Products the instrument is called a buy-write note.

Re: Announcing the Safe, a Replacement for Convertible Notes

#117

Post by syedkarim »

rexreed wrote: post #115
syedkarim wrote: post #114

Earlier quoted context omitted.

Isn't a set-price, as opposed to a discount, the simplest way to align everyone's interests immediately and cheaply?

Sure, but that means setting a valuation. Price = valuation.

Precisely. But there's nothing inherently wrong with setting a valuation. At the earliest stages, it's all very arbitrary anyway. There's no reason not to reward the earliest investors for taking, by far, the greatest risk. A 10%-30% discount does not seem commensurate to the degree of de-risking.

Re: Announcing the Safe, a Replacement for Convertible Notes

#118

Post by rhc2104 »

The SAFE looks great. But one question is, shouldn't SAFE holders have the right to veto a dividend?

While this would be sociopathic behavior, what would stop this from happening?

1) Start company 2) Raise 1 million dollars on SAFEs 3) Distribute 1 million dollar dividend 4) Dissolve company

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