Understanding SAFEs and Priced Equity Rounds

by Kirsty Nathoo

YC Partner Kirsty Nathoo gives the lowdown on several different ways to capitalize your company and how those impact founder equity and cap tables overall.

Watch if:

  • you are raising money
  • you aren't sure how startup investment documents like SAFEs work


Facilitator: I would like to introduce Kirsty who is going to talk in much detail about SAFEs, notes equity, and the like. Kirsty.

Kirsty: Thank you. All right. Good morning, everybody. So, my name is Kirsty Nathoo. I'm the CFO, one of the partners here at Y Combinator. And I have now worked with probably over 1,500 companies in terms of getting them Incorporated, doing our YC investments, and then seeing them through their subsequent raises either on convertible instruments or on equity rounds. So, I've seen kind of a lot by now. And so this presentation is to give you some understanding of some of the things that people don't necessarily understand when they're raising money and to hopefully help you avoid some of the pitfalls that we've seen...some of the mistakes that we've seen founders make. So, the key message in all of this presentation is that it's important that you understand at all stages of the company's lifecycle how much of the company you've sold to investors and, in connection with that, how much therefore you also own. The thing that makes this complicated is that most companies will raise money on convertible instruments first, and because those convertible instruments aren't yet shares, it's not immediately obvious for a lot of founders how much of the company they've sold. So, I'm going to talk through some of the mechanics of that and help you understand how all that works so that you don't get surprised when it's too late and you can't do anything about it. So, the other thing that you should also be aware of is that a lot of companies and a lot of founders will just say, "Oh, I don't need to worry about my cap table. My lawyers deal with my cap table. I don't need to worry." And actually, that's a really dangerous statement. Again, you should make sure that you're understanding this. It's your responsibility as the CEO or as the founder of the company to understand all of this. And there's lots of ways that you can maintain your cap table. There's lots of ways that you can keep track of this. And the simplest form is just a spreadsheet. All it's going to show is who owns how many shares and that's it. That's all you need at the beginning. But there are other services out there that can help and I'll include them on a list of resources after the presentation, but there's tools like captable.io, and Carta, which also help for you to keep track of these things.

Okay. So, these are the three sections that I'm going to talk about. First of all, I'm going to talk about SAFEs and particularly for U.S. companies. Most companies will raise money first on SAFEs or some other convertible instruments, which I will talk about briefly as well. And I know Jeff mentioned the SAFE last week in a little bit of detail, but I'm going to go into much more detail on that and also how the sections of the SAFE works. The S stands for simple. And so hopefully, you will believe me with that and you will all be ready to understand what's going on in that SAFE as you come out of this presentation. Then we'll talk some more about dilution again so that you can see. We're going to walk through the lifecycle of a company from incorporation up to raising a price to series A round so that you can see how things change over that period. And then I'll give you some top tips on other items to do with raising money. All right. So, first of all, the SAFE. So, let's cover what it is and then we'll go through the details of how a SAFE is built up. So, as I said, SAFE, the S stands for simple. The rest of it is a Simple Agreement for Future Equity. And put simply, it's an instrument where the investor will give you money now in exchange for a promise from the company to give shares to the investor at a future date when you raise money on a priced round. There are minimal negotiations with a SAFE. Really, there's only two things that you're probably going to negotiate with the investor, which is how much money you're going to...how much money the investor will put into the company and at what valuation cap. So, really, those two things are the things to negotiate. Whereas when you compare that with a priced round, there's a whole raft of things to negotiate. And that's what makes the price round a lot harder to close and to raise money on them than a SAFE does. So, that's why often companies will start with a SAFE and then when they get to the point of being able to raise more money and they have a lead investor, which they negotiate with for the price round, then the SAFEs when they convert into shares will piggyback on the terms that has been negotiated with the lead investor in the price round.

The other thing to bear in mind is that a SAFE is not debt. So, some of you will have raised on what's known as convertible debt. That's a different instrument. Debts has generally an interest rate attached to it and it has a maturity date where the debt needs to be repaid. SAFEs have neither of those things. So, it's important to understand that there is a distinction between the two instruments, but in terms of conversion in the way that they convert in a priced round, there are some similarities. So, this is the first section in the SAFE. And this paragraph actually includes pretty much all the key details that you need to understand in a SAFE. So, it talks about in exchange for payment by investor, you're gonna...the investor is putting in a certain amount of dollars around this date. And down here, the valuation cap is some number. So, really, those two blanks are the two negotiating points. This paragraph here is something that we've added just recently in our newest version of SAFEs. And this is something that will hopefully help you so that once you've read our SAFE that we have available on our website once, if there's this paragraph on the SAFE, then you know that you have read the SAFE. The idea behind this is that if anything changes in the SAFE, either the company or the investor cannot say this paragraph. It can't say that it's the same as the SAFE that's on the Y Combinator website, and so you'll know as a founder that you should be looking at it more closely to see what's been changed. So, this is just something to keep your eyes open for if you receive a SAFE from an investor.

Okay. So, the anatomy of the SAFE is pretty straightforward. It's only five pages in length, so it's not very long. We've tried really hard to keep the language not too legal so that it's easy to understand. And really, it's split into five sections. Section one talks about what happens in various different sets of events. And so, most of the time, what's going to happen is there will be an equity financing at some point in the future. And so the first part of the section talks about what happens then? How does the SAFE convert? Or there might be a liquidity event, i.e., the company might get sold before the SAFE converts. So, it also addresses what happens if the company is sold whilst the SAFE is still outstanding. Or the company might decide to close down whilst the SAFE is still outstanding. So, it also addresses that. So, those are the three real key events that might drive change from the SAFE. So, it addresses all of those. And often we get questions from founders or from investors saying, "But what happens? What happens if?" And actually these three sections are the answers to pretty much all of those questions. And then there's a couple of other sections where we clarify the liquidation priority, which just means who comes first in the queue to be repaid in these different situations and also, clarifying that the SAFE actually terminates, i.e., it does no longer exist if any of the top three events happen. So, that section is kind of your instruction booklet. If something happens in your company, that's the section you look at to see what happens to you SAFE.

Then the next section, the section two is just the definition section. So, anything that were referred to within the SAFE will be explained in section two. So, if you're not sure what the company capitalization definition is, you go to section two to look at that for an explanation. Section three are the representations that the company makes to the investor. So, it's saying things like the company is duly formed, it's correctly formed in Delaware. Section four is the representations that the investors make to the company, so it's things like the investor saying, "Yes, I agree, I'm an accredited investor." And then section five is kind of legal boilerplate language that needs to be in there. So, really, from your point of view, the sections that you really need to understand are sections one and section two. Obviously, you need to know what you're representing in section three as well, but those section one and section two are the key, key parts. And that bit is only three pages long of the SAFE. So, I'm pretty sure you can all read three pages and understand what's going on. So, I encourage you to do that. Okay. Some of you may have heard, in the last couple of weeks we announced a move to a different type of SAFE. We've really... We've introduced the concept of post-money SAFEs. And it's important that we understand what post-money means. What it basically means is, after all, the SAFEs have converted, what happens at that point? And we'll go into that in a little bit more detail in a moment, but it's easy to get confused about what post-money means here, but it's after all the SAFEs. And the reason why we introduce these is that we wanted to make it easier for founders to understand the dilution that they were taking, how much of the company they'd sold to investors, and so how much less of the company they owned? It was all... And it's a lot easier to understand that with post-money SAFEs than with the previous SAFEs that we had which were known as pre-money SAFEs.

Okay. So, basically, when we're talking about pre-money and post-money, we're talking about the same thing. It's just a different way to express it, to explain it. And so in both a priced round down for SAFEs, the formula stays the same. So, the pre-money valuation plus the amount of money raised equals the post-money valuation of the company. Okay. So, if you have a $5 million pre-money valuation and you raise $1 million, then the post-money valuation of the company is $6 million. Okay? And that's important to remember in a moment. But really, that's as simple as it gets. So, then, based on that so that you can understand how much of the company you sold when you were raising money on SAFEs, the formula is just your owners or the ownership of the investors, the ownership that the investors will take is their amount raised divided by the post-money either valuation in the case of a priced round or valuation cap in the case of a SAFE. So, in our example, before, if the investors were putting in $1 million and the post-money valuation was $6 million, then they will own 16.67% of the company. Does that all make sense to everybody so far? Okay. Good. So, I'm going to talk only about SAFEs with valuation caps here to keep things simple, but just be aware there are other different flavors of SAFEs that you can use and that you may have already used or that you may find that you'll use in future. So, there may be the concept of a discount instead of a cap. So, instead of capping the valuation at say $6 million, it says there's a 20% discount on the series A price. There's also an uncapped SAFE, which basically just says, "I'm going to put money in now as an investor and when you do a priced round, I'll get the same price as the priced round investors are going to get." That's pretty uncommon because the investors who are putting in money early want some kind of bonus for putting in the money early. So, it's pretty unlikely that you'll use one of those. And then finally, there's a SAFE that's uncapped with most favored nation clause, which is basically what that says is, "I'm not going to agree a cap right now, but if you raise some money from some other investors who do have a cap and those terms are better than my terms, I get their terms as well as an investor." So, this one can sometimes happen if you're raising money very early on and you don't really know what the cap is and maybe, you know, you just want to punt it for another month or two, but it just creates a little bit more admin for the founders because it's another thing that they have to keep track of. So, we see them sometimes, again, not all that common. By far the most common is just the valuation cap only.

All right. So, now we understand SAFEs and how they're made up. We're going to talk about dilution and understanding how your cap tables work. All right. So, we're going to walk through this process. So, we're going to start with our company's incorporation, which Carolyn talked about right at the start of the startup school course, I believe, so, hopefully, this will not be anything new to you. Then we're going to talk about what happens when you raise money on SAFE some post-money SAFEs, then we're going to talk about what happens as you hire people and start to issue equity to employees. And then the company is going to do a priced round. And so what happens to the cap table at that point? And now I'll warn you. This is starting to get into the math section of the whole thing, so turn your brains on and keep concentrating. All right. So, incorporation. So, let's just assume it's a really simple company, there's two founders, and they split their shares equally between the two of them. So, in this example, each founder owns 4.625 million shares. So, there's a total of 9.25 million shares issued and each founder owns 50%. That's pretty straightforward, right? And so at this point in order for them to own those shares, the founders have done the paperwork, they've granted those shares through a restricted stock purchase agreement and there's vesting on those shares as was talked about with Carolyn earlier in the course. Okay. So, then the next thing that's going to happen is this company raises some money on a post-money SAFE, and they raised from two investors. So, the first investor comes in quite early and they put in $200,000 at a $4 million post-money valuation cap. And then a little bit later on, investor B comes in, puts in 800,000 at an $8 million post-money valuation cap. So, if you remember back to our formulas, the ownership that investor A has at this point is the amount of money that they've put in divided by the post-money valuation cap which gives them 5% of the company. Same for investor B, 800,000 over 8 million, which gives them 10% of the company. So, in total, the founders at this stage sold 15% of the company. So, even though this doesn't change the actual cap table because these aren't shares at this point, this is just a SAFE, this is just a promise to give shares in future, the founders should know at this stage that they have sold 15% of the company. And if they've sold 15% of the company, then they can no longer own 100% of the company. So, now instead of the founders earning 100% of the company between them, they've been diluted by the 15%, so they're going down to 85% of the company. So, it's important to have that in your brain when you're raising money because whilst the cap table, like I say, doesn't change, the fact that you've just sold 15% of the company is an important fact and it's an important thing to know because you want to make sure that you're not selling too much of the company because you know that there's a lot of future fundraisings that are going to happen with the company and therefore, there's going to be more future dilution. Is everyone happy with how we've got to that 15%? Yes, the question.

Man: So, the founders are the only ones getting diluted at this. The earlier investor doesn't get diluted.

Kirsty: Right. So, the question is, it's only the founders that are being diluted at the moment. And yes, that's exactly right because that's the construct of the post-money SAFEs. All the latest... The latest SAFE investors don't dilute the earlier SAFE investors. It just dilutes the existing shareholders. And at this stage, it's just the founders who are the existing shareholders.

Man: Does it make sense to have shares in the treasury so that they can probably anticipate the dilution?

Kirsty: Okay. So, the question is, does it make sense to have shares authorized, but unissued, I think is what you mean? So, at this stage, it doesn't necessarily make a difference as you'll see in a moment. You actually create new shares that you're going to issue to these SAFE holders when they convert. So, at this stage it's fine to just have the shares that the founders have and maybe some that you want to give out for hiring.

Man: Why you were saying D has a different post-money valuation cap?

Kirsty: Well, in this example... So, the question is, why do they have different post-money valuation caps? And so in this example, you know, it could be for any number of reasons, but in this example, we're assuming that, you know, this one happened maybe a month after incorporation and maybe this one happened six months after incorporation and more has gone on in the company and so there's slightly less risk, and so the company has been able to negotiate a different cap. But things change through the company and it's totally fine to have different caps because as you can see from here, you just calculate everything separately and then add it all together. Okay. So, a company has raised $1 million. First thing it's probably going to do with that money is hire some people. And when you hire employees, you're probably going to give them some equity. And so in this example, the company creates, at this stage, a option pool, otherwise known as an AESOP or an employee incentive plan. There's lots of different names for it. And in this example, they have created a plan or a pool that has 750,000 shares in it, and they've issued out of their 650,000 shares to early employees. So, this has now changed their cap table because they've issued shares. And so the fact that there's more shares being issued means that the cap table changes because we now have more shareholders. And so now we have a total of 10 million shares that have been... Fully diluted basically means the combination of issued and set aside in the option pool in this case. So, now we have our founders instead of owning 100% have 92.5% of the company. And the option plan in total is 7.5% of the company. But remember, those SAFEs. So, these founders don't actually have 92.5% because they have also sold 15% of the company. And so actually, they own less than the 92.5%. They actually own 85% of that, which is about 78.6%. So, again, this is where it gets dangerous for the founders. If they forget about the SAFEs, the founders are sitting there saying, "Well, I own 92.5%. This is great. I own still loads of the company." And they have forgotten about the SAFEs and the dilution they're about to take from that. So, again, it's really important to keep track of how much you've sold on your SAFEs so that you can do that calculation and say, "Actually, I don't have 92.5%. I have 85% of that because I've sold 15% of the company." But it's also these numbers have been diluted by those SAFEs as well. So, as you'll see in a moment, these numbers change as well.

Okay. So, now we're going to fast-forward about, let's say, a year. The company is doing well. It's raised the price round. And it has a term sheet for the price round which says that the pre-money valuation of the round is $15 million. And they're going to raise a total of $5 million dollars of which the lead investor, which is the investor that they do all of the negotiations with is going to invest $4 million. And so if you remember from our formula at the start, the post-money valuation is the pre-money valuation plus the total raised. So, the post-money valuation is 20 million. The other thing that gets negotiated as part of the priced round is the option pool increase. So, generally what happens is that the investors in the series A will say, "Okay. We're gonna put some money in. We know that this money is going to go towards hiring. So, we want you to create an option pool for all the new employees that you're going to employ and give equity to in advance so that it's sitting there ready for those employees." And so, usually, you'd see that the option pool is about 10%. It might go up to about 15%. But anything more than that is fairly non-standard. Yes. Where did that come from? Over there. Okay. Yes.

Man: Is the 10% coming from the founder or collectively?

Kirsty: So, the question is, is the 10% coming from founders or collectively? And you'll see in a moment is going to dilute the existing shareholders and the SAFE holders, but it doesn't dilute the new money.

Man: So, how is the option pool represented on the cap table? Is it represented on the cap or what form does it use?

Kirsty: So, the question is, how is the option pool represented on the cap table? So, if we go back to here, we just show it so that we have the options available from the pool that haven't been issued is a line, and anything that has been issued from the pool is a separate line. The reason why we show those two things separately is that these shares are considered outstanding, they're considered issued, whereas these aren't. And so that's the difference between what... That's what fully diluted means. It means outstanding shares, which are these two lines, plus any shares reserved under the option pool. All right. Where are we? So, quick math question for you. What do we expect that the lead investor will own? What percentage of the company do we think the lead investor is going to own after the round closes?

Together: Twenty percent.

Kirsty: Twenty percent, yeah, for the lead investor, 25% in total for all of the series A investors. Okay? Because the lead investor is going to put in $4 million divided by $20 million gives 20%. So, you'll see in a minute in the cap table that that all works through in the calculations, but it's always good to just do that quick check so that you can sense check what's going on in your cap table. All right. So, in the priced round where you have or where the company has raised money just on post-money SAFEs, and then has raised a price round, three things will happen. And these three things happen at the same time in terms of the documents, but in terms of the calculations, it's important that the order is correct. And so the three things with post-money SAFEs is that the first thing that happens is the SAFEs convert into shares, then an option's pool is increased or created if there isn't one already, and then the new investors invest. And you'll see in a minute how that all works through with the calculations. Now, one other thing that starts to get a little bit confusing here is one of the sort of the lingo of how this works is there's often the lawyers and the founders will talk about the SAFEs being included in the pre-money. And what that is basically saying is that when the new investors invest and they calculate their price per share, the calculation includes the shares from the conversion of the SAFEs. So, even though the SAFEs themselves are referred to as post-money SAFEs, that's talking about how the SAFEs convert. This sentence where the SAFEs are included in the pre-money is talking about how the series A price is calculated. So, it gets a little bit confusing because it's talking about post-money on pre-money, but that's just something to bear in mind when this happens. And obviously, at the time that you're raising a priced round, you're going to have a lot of advisors, you're going to be working with lawyers who can explain all of this to you as well.

All right. Let's go through these three steps then. So, the first step is our SAFEs are going to convert. And we already know because we've already done the calculation that these SAFEs are going to convert into 15% of the company. And so 15% of the company means 15% of the total fully diluted shares, both common shares and preferred shares. So, investors get preferred shares, which have a different set of rights and privileges than the common shares, which is what the founders and employees get. So, we have enough information here in the cap table that we have here to calculate what the actual number of shares are here because we know that they're going to be 15% of the total issued shares. So, we know that this is 85% of the total issued shares, so we know what our total is. And then once we get the totals, we can work out what 5% of that is and what 10% of that is. So, after a bit of algebra, these are the numbers that come through. So, now at this point, we have 11,764,705 shares in total because it's preferred shares plus common shares. Our first SAFE investor who we said was going to have 5% has 588,000 shares, which represents 5% of that 11.7 million. And our second SAFE investor has 10%. Now, it's important to remember that this is partway through a whole process. It's partway through those three steps that are happening in a priced round. And so actually, you're never going to see your cap table looking like this. This is just one step in the calculation, but it's just to break out so that you can see where that 15% has come from. And you can also see here that when we were saying that the founders instead of owning 92.5%, they owned about 78%. You can see that here because they've been diluted by that 15% as have the employees with their options. So, this is the post-money part of the post-money SAFEs after the SAFEs have converted, but before anything else has happened in relation to the priced round. Got it? Okay. All right. So, the next step is... We have a question. Okay.

Man: So, the percent of... If you can go back. So, does the 5%, 10% have anything to do with the post valuation and the SAFE stage?

Kirsty: Okay. So, the question is, does the 5% and 10% have any...

Man: Like, the SAFE stage.

Kirsty: Yeah. Okay. Yeah. So, the 5% and 10% is based on the valuation cap in the SAFE. And so assuming the priced round valuation is higher than the valuation cap in the SAFE, then this is just looked at with reference to the SAFE and it's just connected to the existing shareholders. If in the very rare circumstances that the priced round is lower than the valuation cap on the SAFE, then, actually, the SAFE investors will get a better deal because they will sell their share...their SAFEs will convert at the same price that the series A investors have which has a lower price than the valuation cap. So, actually, there is the potential that this can go up. This percentage can be higher if the price round is valued at a lower price than the cap on the SAFE.

Man: Does that not trigger the conversion if it's not?

Kirsty: It still triggers the conversion even if the valuation is lower because it's the fact that they've raised money that triggers the conversion, not the price. So, it's just something to bear in mind that when we're talking about this, the post-money SAFEs and in this example that you're selling 15% of the company. There is potential that it could be higher, but it's a pretty rare situation where you raise a priced round that's priced lower than the valuation of the SAFEs. And it's also something to bear in mind of trying not to negotiate too hard on the SAFE to make your caps too high because if you raise money on 100 million dollar cap, but then you can only raise money on a $25 million priced rounds, let's say, then you're actually selling more of the company to those SAFE holders than you expected.

Man: If the founders had convertible debt at this point in time, where does that ...?

Kirsty: Okay. So, the question is, if there's convertible debt, so, this would happen here as well. So, it would... The calculation for convertible debt is slightly different, but it would happen in here and you would show them just as other investors because they would be converting into shares in relation to the priced round as well.

Man: What if you went crazy and actually sold 85% of your company and the valuation is lower at the end? What happens can shareholders?

Kirsty; Well, so that's the big question. So, the question is, what happens if you go crazy and sell 85% of your company? Yeah. I mean, that's the problem. The founders can raise too much money on too low valuation caps when they're raising on convertible instruments. They don't realize how much dilution they're taking. And then they get to their priced round and they look at their cap table and they're just like, "What? I only own, you know, 10% of the company now." And unfortunately, there's not a huge amount you can do at that point because you've already entered into the contracts with the investors to do this. And so that's why it's important to not get into that situation in the first place.

Man: You had made a point earlier that the SAFEs are priced...if the cap is higher than the priced round, then you'll do actually a lot better. Can you explain that 'cause I know the SAFE...

Kirsty: Yeah. So, the question is how the cap works in relation to the priced rounds. So, if the priced round is higher than the cap, then the SAFE converts at the cap, which means that the SAFE holders basically get more shares for the same amount of money than the series A investors get. So, in that situation, that's how you know what percentage you're selling. But in the situation where the cap is higher than the priced round, then you would never... It wouldn't be fair to the SAFE holders to have them getting a worse deal than the series A investors because they put money in earlier. And so what happens then is that the calculation, if you go back to the section one of the SAFE where it says what happens in a priced equity round situation, it says, "If the cap is higher than the priced round, then they just use the priced round price to calculate their shares." And so because that priced round price is different, these numbers will go up.

Man: So, you don't lose much, right? The founders don't lose much.

Kirsty: Well, it depends. It depends on the delta. So, if it's only a little bit different, then, yeah, maybe instead of 15%, they've sold 16%, let's say. But if the delta is really big, then it could go up. But again, there's something to be aware of, it's in the current environment, it's pretty unlikely that people raise priced rounds at lower valuations than their SAFEs just because when you're raising money on SAFEs, the investors won't agree to invest at a ridiculously high valuation because they want to get that bonus of the lower price when their SAFEs convert. Yep. Okay. Let's keep going. All right. So, this step you're gonna have to trust me on. So, the next step in the intersection is that the option pool is increased. And this is actually quite a complicated calculation. It gets a little bit circular. And I'm going to be sharing a model with everybody so that you can see how this works if you're interested. But basically what you're trying to do is to get to 10% of the post-money shares are sitting available in the option pool. And in this example, we're going to increase our option pool by 1.695 million. And you'll see in a minute that that flows through into the cap table and you'll see that 10%. But just trust me on this one, because this is quite a complicated calculation. And then step three, the new money invests. So, this is where we have our series A investors putting in $5 million. And there's a couple of calculations that happen in there. So, the price per share, this calculated for the round is the valuation divided by the capitalization. So, this is the pre-money valuation, 15 million. And when we're talking about capitalization here, what we're meaning is this is the total fully diluted shares after the SAFE conversion and the option pool increase. So, that's why this is step three because our SAFEs have converted and our option pool has increased. And so we have our 10 million shares that we had issued, 9.25 to the founders, 725,000 in the options pool, plus the SAFE conversion shares, plus the increase in the options pool. And you'll see the numbers in a moment. So, then the number of shares that the series A investors get is the amount they're investing divided by their price per share. So, those are the three calculations that you need to remember for your series A.

So, here we go. Here are those calculations. So, we're saying that the capitalization, we have our 10 million shares that were already issued, we have our 1.76 million shares from the conversion of the SAFEs, and we have our increase to the option pool of 1.695 million. So, that gives us 13.5 million total shares. We divide our $15 million by those shares to get a new money price. So, this is the price that the investors will pay for their shares of $1.114. So, that means that the $5 million of new money that's coming in will buy 4.48 million shares. And the lead investor because they're putting in 4 million will get 3.59 million of those shares. So, these are the calculations that get worked through. This is what the cap table then looks like post-money. So, this is now... Everything has been done in the round. So, we still got our founders, we still got our options. Those numbers haven't changed. These numbers changed because it's increased by 1.695 million. And you can see here that now this is 10% of the total shares, which is what we were targeting, because that was agreed in the term sheet. We have our SAFE investors who... The number of shares haven't changed because we had already done their calculation for the conversion. But their percentages have changed. It's gone down a little bit. And the reason why those have gone down is because the SAFE investors have been diluted by the series A money and by the increase in the options pool. And then we have our lead investor and our other Investors in our series A. And as you remember, when we did the quick back of envelope calculation or the point of getting the term sheet, a lead investor owns 20%, our other investors own 5%, so in total, they have 25%. And so the founders up here now own 51.5%, which is a big jump from the cap table that they originally were looking at where they owned 92.5%. And that's where this gets complicated. If you don't understand your dilution, if you don't understand how much of the company that you've sold, when you get to this point and you look at the cap table and you're saying, "Oh, no, I only own 30% of the company. How did that happen?" There isn't a lot you can do because most of that dilution has already happened because you've raised money from the SAFEs...because you've raised money on SAFEs. And so that's why it's super important that you keep track of this dilution because at this point, there isn't a lot you can do about it. All right. Moving on. So, a couple of top tips for you. We've mentioned briefly about convertible notes, and that's just another instrument that you can use to raise money in the early days. Often we find companies outside of the U.S. will raise money on convertible debt. There's nothing wrong with it. It is a little bit more complex just because you have to deal with interest that accrues on it and maturity dates, but companies deal with that. But what I would say is try not to have a combination of SAFEs and convertible notes just because it makes things a little bit more complicated in the calculations. So, if you start raising on debt, then probably stick with it, but ideally, start with SAFEs because it's actually making your life a little bit easier.

So, again, we are now recommending that companies use post-money SAFEs, but there are pre-money SAFEs available and some of you may have already raised on pre-money SAFEs, that's totally fine. It just makes it a little bit more complicated to understand dilution. But you can still do the same back of envelope calculation to get a ballpark figure even though it's not exactly accurate. If you have raised money on pre-money SAFEs, then it's fine to come to in future raise money on post-money SAFEs. The calculations just get a little bit complex, but it's totally doable, so that's fine. Don't panic. I would suggest that you probably move on to post-money SAFEs even if you've raised money on pre-money SAFEs just so that you can keep track of your future dilution. And a quick word on optimization in all of this. When you're raising money on SAFEs, don't try to over-optimize for the cap. It gets really easy to start seeing this as a company. And you start talking to your friends and you start saying, "Well, I've raised money on a $6 million cap," and they say, "Well, I've got an $8 million cap, and so I'm more successful than you are." And as Jeff mentioned last week, fundraising is not the be-all-and-end-all, it's a means to an end. So, just don't try to over-optimize, don't try to push this up too far because you're negotiating with investors who do this all day and every day and you're probably not somebody who negotiates this all day and every day. And actually, when I run the numbers on the calculation that we've just been through, if we'd have changed that 800,000 that was raised on an $8 million cap to a $10 million cap, the ownership at the close for the founders would have been 52.7% rather than 51.5. So, it's not actually a huge difference, especially if you have two or three or four co-founders. And the extra pain for negotiating that $2 million cap is probably not worth it. Just take the money, do what you need to do with the money, and make the company a success instead. Okay. So, in conclusion, use post-money SAFEs where you can. Hopefully, all of you can use those going forward. Understand what you're selling with the company. So, make sure that you keep track of your dilution and understand where the company is being sold. And finally, again, don't over-optimize for valuation caps because it doesn't actually make as much difference as you think it's going to make. Okay. So, we have a couple of minutes for some more questions.

Man: So the only you care about is the voting power and not the money?

Kirsty: Sorry. Repeat that. Is the question, do you care about voting power?

Man: You care only about voting power and not about the money you get.

Kirsty: Yeah. So, the question is, don't you care more about voting power? And that's definitely something that gets negotiated as part of the series A term sheet. And so where the voting power tends to come from in here is the composition of the board. And so generally, you want to keep the founders having a majority of the board. And so often the series A, what you'll find is that there's, you know, if there's two founders in the company, you'll have two founders on the board and you'll have a representative of the lead investor on the board. And so the founders still have the majority. And that's really whether the voting power comes from.

Man: How important is to find the lead investor and how should one approach to finding a lead investor?

Kirsty: Okay. So, the question is, how important is a lead investor? So, when you're raising money on SAFEs, you don't necessarily need a lead investor. The beauty of the SAFEs is that as soon as somebody agrees to invest in your company, you can say, "Great, here's the SAFE, sign it and give me all my money." So, even if that's only a small amount of money, that doesn't matter as long as you've negotiated how much they're putting in and what the valuation cap is. So, for SAFEs, it doesn't matter at all, but you don't have a lead investor. At the priced round stage, it is important that you have a lead investor because there's so much to negotiate that you don't want to be negotiating with a bunch of people. You want to negotiate with one person... Oh, well, one investor who is setting out the terms because they're putting in, in this example, $4 million after the 5, and then everyone else gets pulled along with those same terms.

Man: Okay. What is the maximum amount of company you should give up on a seed round or a SAFE round?

Kirsty: Great question. So, the question was, what's the maximum amount that you should give up in a seed round or a SAFE round? If we just quickly go back to this. Okay. So, this is actually a fairly standard cap table that we'd expect to see where the founders own just over 50%. We see that in the vast majority of cases coming out of a series A priced round. And if you think about it, these numbers are set. Generally, in pretty much any series A round, the lead investor is going to want round 20% and the total amount sold of the company is going to be around 25%. The options pool is going to be around 10% post-money. So, that's already 35%. So, then, really, all you have to play with is what the SAFE investors get to drive what the founders own. So, the more you sell to the SAFE investors, the less the founders are going to own. So, in this example where we were selling 15% of the company, that's probably about the range that you want to be looking at. Obviously, every company has a different circumstance. And getting some money in less good terms is better than getting no money in at all. So, there's always, you know, discretion that has to be made. But yeah, this is a fairly standard cap table about 15% on SAFEs, about 25% to the lead, to the series A investors, and about 10% options pool with the rest of the founders. Okay. One more question and then we've probably got to wrap up. So, let's go to the back over there.

Man: If you take a bunch of money for bootstrapping... Do you recommend that be part of the pre valuation or should it also ..?

Kirsty: Okay. So, there's two things there. First thing is, what happens if the founders are putting in money themselves? And the second thing is, should they put in SAFEs? Not SAFE notes because that makes me grouchy because SAFE is not debt, so you don't call them notes. So, that's one of the things to bear in mind. They're just SAFEs. So, the other question was around the founders. Well, there's different ways you can do that. Founders are putting in money, they can just loan the company money. And so then, you know, if they're putting in $25,000 and then they raise $1 million from their SAFE investors, they could repay the founders. Or there are situations where the founders would put that money in on a SAFE and so they potentially get some...or they would in that situation get some series A preferred shares when the SAFEs converts. So, you can do either way. All right. I think we finished on time, so that's good news. Thank you very much for listening. I know this stuff is difficult.