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So, for founders raising let's say, a seed round (with a Series A 18 months down the line), is the recommendation still raise on SAFE (with some cap and/or disc

So, for founders raising let's say, a seed round (with a Series A 18 months down the line), is the recommendation still raise on SAFE (with some cap and/or discount), and then price it at A? It would be useful for the founder community (especially outside YC network) to have examples of how different recent startups have done it - offered discount or cap or both, how they determined the cap, the experience at A, experience with SAFE when dealing with angels/micro VCs, etc. Any founder willing to share that here?

msrpotus 9y ago
Very interested in this as well.
dustingetz 9y ago
If you don't have concrete plans for a Series A in the 18 month timespan does a SAFE still make sense?
- jalonso510 9y ago
  That's one place where the SAFE is better than a convertible note - a note will have to have a specific term for maturity, usually 18 or 12 months, but a SAFE can just sit there outstanding indefinitely until an event causes it to convert.
- anotherfounder 9y ago
  This could get tricky. I imagine, at some point when you feel the round is closing, you'd want to set some terms/valuation and ensure that the biggest investor (or most/all of the investors) feel good about that.
DelaneyM 9y ago
Doing a seed round now. Ultimately the terms are going to depend on investor consensus, but my strong preference is to go uncapped w/ discount. Having a cap is an incentive for me to "grow until I'm 6 months away from X, then focus on raising instead". For some seed investors an early valuation & equity conversion may be desirable, but I'd rather "grow until I'm 6 months away from needing funds to (grow faster|survive)". Having no cap, on the other hand, encourages me to stay lean, grow quickly & ask for money only when it has the greatest value. That's behaviour which may not be friendly to opportunistic short-term VCs looking to get a quick valuation bump, but which is strongly correlated with long-term success and eventual home-runs. I want to give a discount because seed investors are taking a big risk on me, they deserve it.
- anotherfounder 9y ago
  This makes a lot of sense, and is also my preferred route. Have you had any feedback or pushback on this route yet? I am also curious how the reactions differ from Angels to MicroVCs to Seed Funds.
  - DelaneyM 9y ago
    So far everyone's been happy with an MFN, so it hasn't been much of an issue. (They seem happy to let someone else be "the bad guy" who forces terms.) If I secure enough commitment on MFN agreements alone, I plan to default them all into a fairly generous discount.
- CalChris 9y ago
  > Having a cap is an incentive for me to "grow until I'm 6 months away from X, then focus on raising instead". This was my impression as well. I do understand that the deal has to be equitable for both sides. It also has to align interests and as your example shows, the cap doesn't. The discount obviously makes sense since the seed funder is taking more risk.
- lpolovets 9y ago
  (I'm a VC) Uncapped notes are generally a bad idea for everyone involved because they misalign incentives. If you raise a seed at a $6m cap, both your goal and your investors' goal is to help you make as much progress as possible for a Series A. For instance, investors will do whatever they can to help you get to a $30m valuation instead of a $20m valuation. An uncapped note means that investors invest at your next round's price. That means they benefit most of the price of your next round is low. I.e. they'll do as little as possible so that your Series A is at a $20m pre instead of a $30m pre. The misalignment creates perverse incentives. For example, if you ask an investor on an uncapped note to make a key customer intro, if they say yes then their reward if you land the customer is that they'll have even less ownership at the Series A. That's not a good incentive structure :)
  - DelaneyM 9y ago

msrpotus 9y ago

Very interested in this as well.

dustingetz 9y ago

If you don't have concrete plans for a Series A in the 18 month timespan does a SAFE still make sense?

jalonso510 9y ago
That's one place where the SAFE is better than a convertible note - a note will have to have a specific term for maturity, usually 18 or 12 months, but a SAFE can just sit there outstanding indefinitely until an event causes it to convert.
anotherfounder 9y ago
This could get tricky. I imagine, at some point when you feel the round is closing, you'd want to set some terms/valuation and ensure that the biggest investor (or most/all of the investors) feel good about that.

DelaneyM 9y ago

Doing a seed round now. Ultimately the terms are going to depend on investor consensus, but my strong preference is to go uncapped w/ discount. Having a cap is an incentive for me to "grow until I'm 6 months away from X, then focus on raising instead". For some seed investors an early valuation & equity conversion may be desirable, but I'd rather "grow until I'm 6 months away from needing funds to (grow faster|survive)". Having no cap, on the other hand, encourages me to stay lean, grow quickly & ask for money only when it has the greatest value. That's behaviour which may not be friendly to opportunistic short-term VCs looking to get a quick valuation bump, but which is strongly correlated with long-term success and eventual home-runs. I want to give a discount because seed investors are taking a big risk on me, they deserve it.

anotherfounder 9y ago
This makes a lot of sense, and is also my preferred route. Have you had any feedback or pushback on this route yet? I am also curious how the reactions differ from Angels to MicroVCs to Seed Funds.
- DelaneyM 9y ago
  So far everyone's been happy with an MFN, so it hasn't been much of an issue. (They seem happy to let someone else be "the bad guy" who forces terms.) If I secure enough commitment on MFN agreements alone, I plan to default them all into a fairly generous discount.
CalChris 9y ago
> Having a cap is an incentive for me to "grow until I'm 6 months away from X, then focus on raising instead". This was my impression as well. I do understand that the deal has to be equitable for both sides. It also has to align interests and as your example shows, the cap doesn't. The discount obviously makes sense since the seed funder is taking more risk.
lpolovets 9y ago
(I'm a VC) Uncapped notes are generally a bad idea for everyone involved because they misalign incentives. If you raise a seed at a $6m cap, both your goal and your investors' goal is to help you make as much progress as possible for a Series A. For instance, investors will do whatever they can to help you get to a $30m valuation instead of a $20m valuation. An uncapped note means that investors invest at your next round's price. That means they benefit most of the price of your next round is low. I.e. they'll do as little as possible so that your Series A is at a $20m pre instead of a $30m pre. The misalignment creates perverse incentives. For example, if you ask an investor on an uncapped note to make a key customer intro, if they say yes then their reward if you land the customer is that they'll have even less ownership at the Series A. That's not a good incentive structure :)
- DelaneyM 9y ago