51–60 of 82 posts
That's friends and family size money. Why get a VC at that scale?
> Why get a VC at that scale? A dollar of VC is generally worth, ceteris paribus , more than a dollar of friends & family money. The coaching, connections, reputation boost when talking to other investors, sales prospects, potential employees, the media, et cetera are meaningful.
Could someone please explain this in laymans terms?
Great that YC is simplifying their deal and making it more standard and easier for founders to understand. Also great that they're switching the standard SAFE to be a post-money SAFE, as this will eliminate a lot of confusion around dilution that resulted from the complicated math of the old standard SAFE. Interestingly, unless I'm understanding this incorrectly, this change might mean a worse deal for founders going…
On one hand pre-money SAFEs diluting pre-money SAFEs is helpful to founders. On the other hand it makes it impossible to calculate dilution. As a result, a large number of companies are raising money without understanding their ownership. Once they get to Series A they get a rude awakening when they end up owning less than 50% of their company. By moving to post-money SAFEs every founder will have a clear understandi…
It's true that founders could compensate for this by raising SAFEs from other investors at a higher valuation, but that is likely to make those raises a little more difficult, so there is some downside.
That's friends and family size money. Why get a VC at that scale?
Great that YC is simplifying their deal and making it more standard and easier for founders to understand. Also great that they're switching the standard SAFE to be a post-money SAFE, as this will eliminate a lot of confusion around dilution that resulted from the complicated math of the old standard SAFE. Interestingly, unless I'm understanding this incorrectly, this change might mean a worse deal for founders going…
(1) The modeling you’ve done for the premoney safes is correct, but it’s incorrect for the postmoney scenario. That’s because Angelcalc hasn’t been updated yet for postmoney safes that track the one we released. Angelcalc includes the Series A option pool increase in both flavors of safes, because what people were doing when flipping standard premoney cap safes to postmoney cap safes is they were just changing the pre to post, and nothing else. We deliberately took out the Series A pool increase for reasons that are all detailed in our post. That means both we and the safe holders share the Series A pool increase with the founders, which is not how it’s working on Angelcalc (but we will update it soon).
Also, in your postmoney scenario, the valuation cap for the $2M safe needs to be adjusted to be a $12M postmoney cap safe.
So if you update the postmoney scenario using all of your variables based on the postmoney safe we released, the results are different. I did it by hand on excel - here’s a screenshot:
Happy to send you a copy of the excel file. Also, to be perfectly transparent, these examples are somewhat artificial because they assume a 0% option pool issuance in both cases, which is unlikely to be the case. Safe investors will do better than in the screenshot I sent the more options that are issued before the Series A round. They also have the option now to ask for a template side letter to participate pro rata in the Series A round itself.
(2) The YC deal should be viewed together with the money founders will raise at demo day, i.e. as one continuous round, and thus the combined % of the company you end up selling. That combined % for YC and demo day safes was often too high in the old deal because founders had a hard time understanding how dilution was unfolding. Safe rounds may not have been priced correctly because of that lack of clarity. With these new changes, the days of raising on safes and not knowing how much you owned are over. The days of planning a Series A fundraise not knowing how much you’ve already been diluted are over. We strongly believe that founders will end up less diluted by the combined % of YC and demo day safes. It’s interesting that you would characterize an uptick in YC ownership as “downside” for the founders. I don’t think founders look at our ownership - they look at theirs.
(3) An underlying assumption of your post is that the safes and YC deal are changing, but everything else — valuations, option pools, amounts people raise and dilution transparency (or lack thereof) — will remain the same. The point of us doing this though is that we expect it to change all of those other things. Everything is tied together. As Michael already pointed out, once you can see what’s happening, both investors and founders can take better actions on both fronts. High-res fundraising should also become easier, as Carolynn points out on http://ycombinator.com/documents.
> $500k safe at a $10 million post-money valuation cap means the founder has sold 5% of the company. This is a common oversimplification, but it's somewhat dangerous and I would be happier if people were more cautious in what they said here. It simply doesn't mean what you said; it means the founder has sold at least 5% of the company. If you're going to either raise 50m or shut the company and ditch your investors,…
Everything you say is fair. On the point about "at least 5%," this is addressed in footnote #3 to the blog post. It's true that it's a simplification, but that's partly what makes the construct easier to work with. I think the other thing to take into account is that if you're doing a comparison of safes, notes and priced rounds, it's not just a matter of seeing if speed and cost are equal, but what else you might ha…
Also: these terms are completely reasonable and under normal circumstances if I were doing a startup – and this valuation made sense – they'd be terms I'd be happy to take. For the avoidance of doubt, all of this is about the marketing, not the substance; the substance is above reproach.
As you say, speed, costs, rights (board seats, information, pro-rata, drag-along/tag-along, you name it), pref structure, etc are all real things. I just prefer addressing those all up front.
Overall, simplifying how to understand one's cap table is great. It gets in the way of many founders understanding their business in really pernicious ways. I do believe this will change the dynamic for YC founders dramatically 1 - 3 years out if not ready for a Series A (equity round) but need more capital (seed extension). I know many people who raised $500K - $3mm more on SAFEs. Because they were pre-money, the di…
Earlier quoted context omitted.
no need for a discount if there's a cap. Discount is nice if you don't want to try and set a cap/price, but if you're OK setting a cap then it effectively grants a discount
Incorrect. A cap means that above the cap, no discount matters. Below the cap, however, the discount is applied. Example: raising 1M at 10M cap, 20% discount. Scenario 1: next priced round at number below 10M - the cap doesn't apply, the discount does. Scenario 2: next priced round at number between 10M and 12M - the cap doesn't apply, the discount does. Scenario 3: next priced round at more than 12M - cap applies, d…
You're right though that there's a flavor of safes that contain both a discount and a valuation cap, and the investor gets the benefit of whichever approach results in more shares, and your explanation is good.
Earlier quoted context omitted.
Everything you say is fair. On the point about "at least 5%," this is addressed in footnote #3 to the blog post. It's true that it's a simplification, but that's partly what makes the construct easier to work with. I think the other thing to take into account is that if you're doing a comparison of safes, notes and priced rounds, it's not just a matter of seeing if speed and cost are equal, but what else you might ha…
Yep. I'm essentially arguing that simplifying here is dangerous, no construct is easy to deal with, and I'd rather more care were taken (broadly across the entire industry, not singling out YC here) in representing that. Also: these terms are completely reasonable and under normal circumstances if I were doing a startup – and this valuation made sense – they'd be terms I'd be happy to take. For the avoidance of doubt…
What are the practical implications of "post-money cap safe"? Could someone please explain this in laymans terms?