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How to paper founder investment in company? SAFE or note?
Hi all, I'm a solo founder of an AI company. I'm wondering how to document the money I put in my company pre-funding. I looked into the SAFE but the lawyer I consulted said to use a convertible note as the SAFE was 'just a silicon valley thing'.
Pros of SAFE: I trust the YC provided docs so don't have to spend $$$ on having a lawyer draft the document.
Cons: Little guidance available on how to use them as a founder so here I am hoping y'all can help.
There are 3 types (https://www.ycombinator.com/documents/)
Safe: Cap, no Discount
Safe: Discount, no Cap
Safe: Cap and Discount
Safe: MFN, no Cap, no Discount
Anyone here used a SAFE before? Which would be best for a founder to paper their own investment in the company? And which for an angel?
Thanks all!
- danieltillett 9y agoThe answer is complex, because it depends on the tax laws of where you live. Having said this if you are the only founder and the only one putting money in then it does not matter too much. You may be better off not even incorporating until you are ready to raise (once again it depends on your the tax laws of where you live). You really need to talk to a good accountant who knows your situation in full.
- zebo 9y agoHey! I live in Palo alto, california. Thanks for the advice. So I am taking on a cofounder and raising money in the next 2 months - which is why I started thinking about this! I had to incorporate so I could sign SAAS contracts with fast food chains and develop and deploy AI for them.
- brudgers 9y ago[random advice from the internet] Based on what I've read, the big advantage of a SAFE is that it facilitates transfer of capital from outside investors to the corporate account quickly by putting off valuation until later. If the money is already in the company, then speed is not an issue. Parsing your lawyer's comment, there may be something there in that SAFE probably makes less sense the further one gets from Silicon Valley style investment strategies and Silicon Valley's connotation for "startup". On the other hand, if you don't like your lawyers advice or don't think it reflects applicable experience, find another lawyer. If the money is already in the company, there's probably a bit of a legal mess regarding assigning value to that investment after the fact. Personally, I'd be more in favor of considering a sunk cost and simplifying the cap table on paper. The future preferred equity that would come from conversion later can be provided to the founder as common options now. A founder with preferred stock immediately has interests that are less aligned with those of employees and future cofounders in regard to structuring a liquidation event. In the case of a typical outcome where the startup is worth $0.00 there's no benefit for the additional cap table complexity. In the case of a great outcome, there's no benefit to the either, it's just a matter of which of the founder's pockets the money flows to. Making the investment a loan seems like a simple solution. In the event of liquidation where there is some but not much cash, a loan would be a liability on the company's books that gets repaid before preferred investors divide the rest. It also avoids a potential problem terms that provide early investors with options to follow on their initial investment...the ways in which a founder would tend to get the capital for follow up investment don't seem aligned with company success...at the very least it is an additional distraction. Finally, worrying about this is the sort of distraction SAFE's were intended to solve. But the applicable context is sophisticated investors operating with a mindset similar to that in Silicon Valley and not to address founder cash infusions. Good luck.