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💸 SAFE NOTES EXPLAINED CLEARLY W/ ADDITIONAL COMMENTS BELOW💸 SOURCE: Kevin Jurovich 💸Key terms in a #SAFE note include: Valuation Cap: Maximum company valuation for converting the SAFE. Discount Rate: Percentage reduction on share price during conversion. MFN Clause: Ensures equal or better terms if new SAFEs are issued. Conversion Trigger: Event that converts the SAFE into equity. SAFE notes benefit #investors by offering a simplified, standardized investment process with potential for high returns. They convert to equity at a discount or valuation cap, providing early investors with favorable terms. Additionally, the MFN clause ensures they receive the best terms available in subsequent rounds. 💸A valuation cap benefits founders by potentially reducing equity dilution. If the company's valuation exceeds the cap during conversion, the SAFE converts at the capped valuation, resulting in fewer shares issued to investors. This preserves more equity for founders, especially if they are confident in achieving higher valuations in future rounds. 💸A discount rate in a SAFE note provides a percentage reduction on the share price during conversion. This means that when the SAFE converts to equity, the investor gets shares at a discounted price compared to the current valuation, offering an incentive for early investment. 💸An MFN (Most Favored Nation) clause in a SAFE note ensures that if a new SAFE is issued with better terms, the investor with the MFN clause can opt to receive those same favorable terms. This protects early investors from being disadvantaged by subsequent funding rounds. 💸A conversion trigger in a SAFE note is an event that converts the SAFE into equity. Common triggers include a priced equity round or a liquidity event. 💸Examples of SAFE notes include: Fixed Conversion at a future date, Valuation Cap with no discount, Discount with no valuation cap, Valuation Cap & Discount, and MFN (Most Favored Nation) clause. These variations offer different terms for investors and founders. #SAFENOTES #CAPITALRAISE #INVESTOR #INVESTING #EARLYSTAGE #FOUNDERS
Mastering the SAFE note 💸 If you're an early-stage founder, get familiar with SAFEs. 89% of all the money raised in pre-seed rounds went through SAFEs instead of convertible notes in Q4 2023. SAFEs don't neatly fit into the debt or equity category, and they don't accrue interest. This will prepare founders to approach investors and secure funding through a SAFE Note: 𝗙𝗶𝘃𝗲 𝗗𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝘁 𝗧𝘆𝗽𝗲𝘀 - Fixed Conversion at a future date - Valuation Cap, no discount - Discount, no valuation cap - Valuation Cap & Discount - MFN (Most Favored Nation) 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: 𝗦𝗲𝗲𝗱 𝗥𝗼𝘂𝗻𝗱 📈 Investor invests $25,000 with a $5m Valuation Cap, 20% Discount. - Pre-money valuation of the company $10m - Number of Shares= 2m - Share Price= $10m/ 2m= $5 𝗢𝗽𝘁𝗶𝗼𝗻 1️⃣ (Discount) - Share Price after discount: $5 * (1 - 20%) = $4 - Total Number of Shares: $25,000 / $4 = 6,250 shares 𝗢𝗽𝘁𝗶𝗼𝗻 2️⃣ (Valuation Cap) - SAFE Investor choosing $5m valuation cap - Share Price= $5* ($5m Valuation Cap/ $10m pre-money valuation)= $2.50 - SAFE Investment= $25,000 - Total Number of Shares= $25,000/ $2.50= 10,000 - SAFE Investor will apply the Valuation Cap option; $2.50/ share. - Finally, the total number of Shares for SAFE Investor= 10,000 - Share Price at Seed $5 - Share Value of SAFE Investors= 10,000*$5= $50,000 - SAFE Investment= $25,000 - Unrealized Return= (($50,000- $25,000)/ $25,000)* 100%= 100% 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼 2️⃣ - VC Firm Invests at a Pre-Money Valuation = $6 Million - Total number of shares 2m - Share Price= $6 m/ 2m= $3 𝗢𝗽𝘁𝗶𝗼𝗻 1️⃣ (Discount) - SAFE Investor Choosing Shares at 20% Discount - Share Price= $3*(1-20%) = $2.4 - Total Number of Shares= $25000/ $2.4= 10,417 𝗢𝗽𝘁𝗶𝗼𝗻 2️⃣ (Valuation Cap) - SAFE Investor choosing $5m valuation cap - Share Price = $3* ($5 Million Val Cap/ $6 Million valuation) = $2.5 - Total Number of Shares= $25,000/ $2.5= 10,000 - SAFE Investor will apply the Discount; $2.4/ share. - Total number of Shares for SAFE Investor= 10,417 - Share Price at Seed = $3 - Share Value of SAFE Investors= 10,417*$3= $31,251 - SAFE Investment= $25,000 - Unrealized Return= (($31,251- $25,000)/ 25,000)*100%= 25% The higher the Valuation Cap in the SAFE round, the better it is for the Founder, resulting in a lower dilution of Equity provided the Founders are confident to close the next round at a higher than the valuation cap. 𝗠𝗙𝗡 𝗖𝗹𝗮𝘂𝘀𝗲 - Let’s say SAFE A has an MFN Provision. - If a new SAFE B is issued, the company has to tell SAFE A about it. - If the terms of SAFE B are better than SAFE A, SAFE A can ask for the same terms as SAFE B. Thanks to Fazlur Shah for the math illustration and share! Some top-tier follows on the topic: - Chris Harvey, a fund lawyer who regularly drops pearls of wisdom - Peter Walker, who shares data on SAFEs and broader startup insights #startups #fundrasing #venturecapital ____ Enjoy this? Follow Kevin Jurovich for daily startup & VC insights and the occasional meme. ✌️
