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

I am slowly ramping up on the options my co-founder and I have to make capital contributions to our bootstrapped C Corp. When we incorporated we each purchased 40% of the available common stock and set aside 10% for early staff leaving 10% available. My proposed strategy is to track all founder capital contributions as SAFEs that will convert to equity issued from the remaining 10% common stock in Series A. All other stock (ESOP or VC) will be sold as preferred stock. Is this a sound strategy? If not, how would you adjust it for a founder team that would prefer not to track capital contributions as debt?

Tracking capital contributions as debt is the best choice (after incorporation). Pay yourself back 6% non-compounding interest and make things easy. Don't buy your own equity just to cover short-term expenses. Reach out (email in profile) if you would like to see a template.

Alternatively, refile your articles and stock purchase agreement and tie that capital to the stock purchase or initial contribution. I would still recommend founder loans instead. If you use a SAFE or other convertible debt on amazing terms, future investors may ask for the same terms.

Edit: I financed my startup (https://rumble.run) that way and paid myself back a month ago. Painless all around.

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 for the F&F SAFE, and we basically just considered it part of that round.

The second part of your plan is unclear to me. When you issue employees options, those will generally be options to buy common stock, not preferred. And if and when you raise a priced VC round for preferred shares, all of your SAFEs will then convert to preferred shares.

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.

Regarding contingency plans, you don't need to have a hard repayment date in the loan terms and can let it accrue interest indefinitely (until bankruptcy, acquisition, or otherwise). Unlike traditional convertible debt a founder loan normally doesn't "blow up" into a huge equity stake if not paid back.

If things don't work out and you have the opportunity to roll the founding team into an another company (acquihire), loans are an easy thing to assign value to, even if the IP or goodwill is more difficult. Negotiate the loan repayment as a signing bonus if you can.

If things work out and you either raise money or bootstrap to profitability, you can pay off the loans as it makes sense, or just forgive them outright if that's easier. Either way you probably don't need to involve your whole board to manage it, unlike equity changes.

I get the desire as a founder to obtain the same terms on capital as future investors, but it can put you in a weird place and can complicate future fundraising. Props to anyone who can make it work, but I had good luck with the founder loan process and felt like it was the cheapest way to finish bootstrapping (we did).

Good luck either way!