If the founders and investors all own SAFE notes, how bad is that for common stock option holders?
Why SAFE notes are not SAFE for investors?
Risks to investors: SAFE notes are not an official debt instrument. This means there is a chance they will never convert to equity and that repayment is not required. Incorporation requirement: A company must be incorporated to offer SAFE notes, and many startups are LLCs.
Why might a company and investor agree to using a convertible note or SAFE agreement instead of a priced offering for equity?
A convertible note (“con note” if you’re cool) is simpler than a priced equity round mainly because it postpones the need to agree on a pre-money valuation of the company prior to investment. Instead of the startup offering shares to the investors, it offers a convertible note, which is a loan to the company.
Do SAFE investors get diluted?
Their percentages will stay locked and fixed, no matter how many other SAFE investors are involved in the round. This means that when the Series A begins, none of the SAFE investors will dilute each other’s ownership percentages. Instead, they’ll only dilute you, the founder.
Do SAFEs convert pre-money or post money?
Post-Money SAFE. The difference between the Pre-Money and Post-Money SAFE is that with a Pre-Money SAFE, the conversion into equity does not include the conversion of the SAFEs in its calculation. Consequently, a Post-Money SAFE does include the conversion of the SAFEs in the equity calculation.
What happens to SAFE note if startup fails?
When a startup fails, the company typically has run out of money. The owner of a convertible note may get nothing, or at best may only receive pennies on the dollar. You also may be able to write off your loss. There are a number of factors that go into determining what happens with a convertible note.
How do SAFE investors get paid back?
If the company has a change of control or an IPO before the SAFE has converted, the investor will receive, at their option, a cash payment for their purchase amount or the equivalent in common stock of the company.
Are convertible notes better than SAFEs for investors?
Maturity Dates in Convertible Notes
Since most startups are cash-poor, paying back the loan is usually not an option. Defaulting on a convertible note could lead to bankruptcy. This is one area where SAFEs offer a clear advantage over convertible notes since they aren’t a loan and don’t have to be repaid.
Are convertible senior notes bad?
Convertible notes are destructive when used carelessly. Having too many notes or poorly structured notes outstanding can put your company and later negotiations at risk by complicating your cap table.
Why convertible notes are safer than SAFEs?
A convertible note is debt, while a SAFE is a convertible security that is not debt. As a result, a convertible note includes an interest rate and maturity rate, while a SAFE does not. A SAFE is simpler and shorter than most convertible notes.
Do SAFEs dilute other SAFEs?
At the beginning of the Series A, the investor’s SAFE is converted into shares equaling a 5% ownership stake in the company. Other SAFEs are converted, too, but they do not dilute the investor’s ownership stake.
Do pre-money SAFEs have a valuation cap?
Valuation Cap in Safe
This is why we recommend Safe investors use a pre-money valuation cap – their ownership may increase. If the valuation cap is lower than the actual valuation of the company at the next funding round, the investor will receive a greater proportion of equity.
Do SAFEs have pro rata rights?
What is a SAFE Pro Rata Rights Agreement? A SAFE Pro Rata Rights Agreement is a letter by which a company gives pro-rata rights to a SAFE investor. By using a SAFE Pro Rata Rights Agreement, a SAFE investor has the right to purchase more shares in a company if the company raises a further round or rounds of financing.
Are SAFE holders shareholders?
SAFEs are not common stock.
SAFEs do not represent a current equity stake in the company in which you are investing. Instead, the terms of the SAFE have to be met for you to receive any shares in the company.
How does a SAFE note convert?
SAFE notes contain a few primary terms that alter how they eventually convert to company shares, and they are: Discounts: SAFEs sometimes apply discounts, usually between 10% and 30%, on future converted equity. This means that the investor will be able to purchase shares at a discount on the future financing.
Can you sell a SAFE note?
Risk note: Startup investing is risky, so there’s no guarantee of a return on this kind of investment. Can I sell my SAFE? In general, you can only sell a SAFE after one year from purchase date and only if you find a buyer, which might not be easy to do.
Is a SAFE a priced round?
SAFEs convert into stock in a future priced round. They’re considered a type of warrant—not a debt—meaning they give investors certain equity rights.
Do SAFEs convert to common or preferred?
The most popular replacement for convertible notes are safes (short for simple agreement for future equity), created by Y Combinator. Like convertible notes, safes can convert into preferred stock.
What is the safest thing to invest in right now?
Overview: Best low-risk investments in 2022
- Short-term certificates of deposit. …
- Money market funds. …
- Treasury bills, notes, bonds and TIPS. …
- Corporate bonds. …
- Dividend-paying stocks. …
- Preferred stocks. …
- Money market accounts. …
- Fixed annuities.
What’s the difference between preferred stock and common stock?
The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
Do SAFE notes have liquidation preference?
SAFE notes offer none of the protections that convertible equity does. There is no liquidation preference, no guarantee you’ll get your money back and no guaranteed timeframe for equity conversion. However, this might not be that big of a deal considering the stage of investment.
Are SAFEs founder friendly?
The company’s bylaws and other investor agreements are either silent on the issue of non-competition or expressly allow competition. Y Combinator Safes meet section 2.5 of Founder Friendly Standard because they are silent on the issue of non-competition.
Are Safe agreements good?
SAFE agreements allow investors to convert investments into equity during a priced round at some future point. It’s also worth noting that SAFE agreements are advanced, high-risk instruments that may never turn into equity. They don’t accrue interest, nor are startups required to repay investors if they fail.
Why are SAFEs good for investors?
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.