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Announcing the Safe, a Replacement for Convertible Notes
- deleted 13y ago[deleted]
- beautybasics 13y agoFinally something sane
- ajju 13y agoThis is an example of one of the key things that sets YC apart from every other early stage investor. Like the startups they fund, they constantly improve their "product" to make something entrepreneurs want.
- CyrusL 13y agoWill YC VC use these in the upcoming batch?
- pg 13y agoYes, the YCVC investments this batch are going to be on safes instead of notes.
- vasilipupkin 13y agoSo, since there is no qualifying event, investors could get stuck without any ownership for a while. for YC this is most likely a non-issue, but most other investors won't be able to, thus providing YC with a bit of extra edge in attracting great entrepreneurs. Fair assessment ?
- ksar 13y agoNot necessarily. The 'caps' on these warrants are likely to be lower to compensate investors.
- clevy 13y agoA company that never has one of the qualifying events is likely to be an extreme corner case. So an investor could end up holding a safe for a while, but for the vast majority of companies, there will be a financing or a merger / acquisition at some (or an IPO).
- labaraka 13y agoQ: What happens if the startup does well after the safe and doesn't need to raise any money and doesn't have a liquidity event? Are the safe investors stuck with a security which does not derive any economic (e.g., dividends) value and they don't have any control?
- EGreg 13y agoConvertible notes convert into equity (either at the holder's or issuer's option) on the QFE - a Qualifying Financing Event. Often that also includes certain revenue threshholds and/or time limits. Does the "safe" have provisions for this?
- james_alonso 13y agobut in the worst case with the convertible note, the investor gets their money back. and often but not always, the note will also provide that if the note matures hasn't been a QFE, then the note can convert into common stock.
- logicallee 13y agoEDIT: Below, I mean from the point of view of subjective valuation by investors of the different possible outcomes. Nobody wants to have debt repaid when a company takes off that you could have had early stock in. (And normally I think that convertible debt doesn't allow such provisions.) Losing the amount invested (investment going to zero) is really, subjectively, not the "worst case" - because it's money the investors could stand to lose. Instead, subjectively, the worst case (and related to a common investor fear, FOMO, fear of missing out), is making the original and only seed investment that launches the next Snapchat (or whatever), and then getting failing to own any of it due to something like the company not raising another formal round or otherwise repaying the debt instead. That's subjectively a much worse case, then having an investment go to zero, which is rather expected. Losing 100% of the investment is the "default" case, not at all worst or unexpected, getting converted into equity at a very small and unsure company is the "good" case, getting converted into the next snapchat or whatever is the amazing lottery-winning case, and losing out on the next snapchat or whatever despite ponying up the cash is the worst possible case that you would kick yourself for forever, subjectively speaking. IMHO. If people here make lots of seed-stage convertible investments they can say whether this matches their valuations, this is just my opinion.
- w4 13y agoSo, based on the writeup, it's just an option? And this didn't exist already? It seems so obvious in retrospect it's surprising no one had thought to do this. Is there anything special that makes this substantially different from a vanilla option, or is it just that a Safe is standardized in an easy to use way?
- jwb119 13y agoAn option, strictly speaking, has an underlying security that already exists. The Safe, like a convertible note, doesn't have an underlying security yet, since the company hasn't created the preferred stock that it would convert into yet.
- w4 13y agoWell, sort of. In a broad sense an option is simply an irrevocable right to acquire or do something, without an obligation to actually acquire or do it. You can write options for whatever you'd like, despite securities being the most common use. You're right about securities; the security usually exists prior to offering a contract on it. But even then it gets a little more complicated. For instance, I can write a naked option (an option to buy a security I don't even own). They're pretty flexible instruments, and I'm not sure how Safes are substantially different. That having been said, it sounds great for founders and funders, since it's far simpler than the alternatives, and I'm shocked no one has thought to do this before. Kudos to the YC folks for having the insight to set it up.
- jwb119 13y agoRight, but I wasn't speaking in the broad sense. In the legal sense, an option has to have a very specific underlying security. That's the case with even a naked option - you know exactly what the underlying security is. The Safe is substantively different because the underlying security isn't defined at that specific level. But agreed, kudos to YC :)
- w4 13y ago
- eigenrick 13y agoSo did YC just invent private equity options?
- acjohnson55 13y agoAnybody know how this compares to convertible equity schemes, like [1], which made front page last summer in a few stories? [1] http://techcrunch.com/2012/08/31/thefunded-founder-institute-and-wilson-sonsini-debut-startup-friendly-seed-financing-vehicle-convertible-equity/ http://techcrunch.com/2012/08/31/thefunded-founder-institute...
- ed 13y agoSafe is probably favored to become the standard vehicle for seed rounds, a benefit of being sponsored by YC. Investors will require less convincing and at first glance Safe seems to be at least as good as convertible debt (as fast and cheap as convertible debt, with no promise of repayment).
- acjohnson55 13y agoThat's certainly valid from a marketing standpoint. Although, convertible equity was published WSGR, which may not be a household name, is still an entity that anyone in the funding game should be familiar with. I'm really more interested in whether there are significant structural differences between the two schemes.
- steven2012 13y agoVery interesting! Sounds like a really good thing for YC members. So if a company manages to get to a pre-IPO stage, will the accounting for these warrants be more complex? It sounds like trying to value one of these warrants might add some/a lot of extra work.
- jwb119 13y agoJust like a convertible note, as soon as there is an equity financing the Safe would just "convert" into a class of preferred stock. So you wouldn't have the valuation problem after you do a first financing, if I understand correctly.
- ATLmediaguy 13y agoThis is a great option. It's about time!
- jlevy 13y agoagreed
- mathattack 13y agoI like this. Instruments that look like debt (terms and interest rates) generally are the instruments of lower risk investors. Linking them to equity is the game of wall street arb desks. Turning the instrument into a warrant is more in lines with high stage early equity investing - giving folks an option on a potentially large upside.
- oijaf888 13y agoHow do wall street arbitrage desks link equity and debt? While I'm sure there's some degree of correlation, it appears that debt securities tend to be much more longer viewed than equity.
- mathattack 13y agoYou can think of a convertible bond as a bond, with an option on the stock. So the bond may be worth $100, and the option to buy the stock might be worth $20. Since convertible bonds aren't liquid, and the implied option may be hard to short, the $120 combined price is really just theoretical. If the convert trades at $110, then the buyer will buy the convert, and then try to short the debt (either shorting another bond from the same company, or with CDS), shorting some amount of stock (Perhaps a half share per option calculated with Black-Sholes or another option pricing method, or perhaps going short a similar option). Does this make sense? If not, I can try to write it in more clear English.
- marrington 13y agoThis looks good to me, as long as it's enforceable (as in the state sees it as a valid, binding contract). It's still debt until it converts as far as I can tell, which is the only way I know of to give the company money today for securities that don't exist yet.
- JackFr 13y agoSo as I understand it, investors want priority over equity holders in the event of a liquidation, but without the regulation and potential tax headaches of debt. Since [convert] = [bond] + [option] what we do is make [bond] pay no coupon, and strike the option weirdly and make it look like it is a new (disruptive?) form of investment, when really it's tax/regulatory arb. Caveat: I am not a lawyer or banker, nor have actually read the documents, though I did read the OP.
- syedkarim 13y agoI don't think anyone is claiming it to be truly innovative and disruptive, as it's basically a warrant. But that doesn't take away from the value that the Safe creates, which is a standardized and well-thought out legal instrument that is freely available and modifiable.
- kg4lod 13y agoI'm an entrepreneur, so it all sounds great for me, but why would investors go for this? It seems like they give up a lot of down-side protection: (1) No ability to convert or abort in the absence of a QFE, (2) no more first creditor protection -- if the company goes under, but also has outstanding loans, investors don't participate in a share of the liquidation proceeds as they would as debt holders (3) no interest = less equity at conversion? Am I wrong here? What am I missing? Thanks YC for your ongoing efforts!
- tptacek 13y agoI'm assuming that the theory here is that the good investors are more concerned about being in on the next Snapchat or Airbnb, and a lot less interested in bolstering downside protections that only apply if an investment is going to be one of the unproductive ones anyways. Meanwhile, the good companies aren't going to be likely to entertain financing on anything but terms like these, so fighting them just incurs an adverse selection penalty. The same thing seems to have happened with convertible debt, which was preceded by financing mechanisms that were way, way more onerous for entrepreneurs.
- kg4lod 13y agoCompletely agree with you. The article seems to make the point that investors would welcome these changes, when in reality, we will be forcing these changes on investors. That was precisely my experience with the series AA.
- deleted 13y ago[deleted]
- not_that_noob 13y agoWith the progressive reduction in the cost of creating a startup, there is a shift in the leverage fulcrum toward the entrepreneur away from investors. This is a milestone that marks this progression. Yes it's marginally worse for investors, but honestly the investors who would care about such minimal edge-case benefits typically don't understand how startups work, and are thus not the ones you want anyway.
- MediaSquirrel 13y ago"the preferred stock that a SAFE holder is issued will have a liquidation preference that is equal to the original SAFE investment amount, rather than based on the price of the shares issued to the investors of new money in the financing. " This point is incredibly important and one of the key downsides of debt from the company perspective, as convertible notes create outsized liquidation preference upon conversion. And when things don't go as well as you hoped, liquidation preference matters a ton. Kudos PG et al. EXCELLENT work. See: http://ycombinator.com/safe/SAFE_Primer.docx http://ycombinator.com/safe/SAFE_Primer.docx
- andrewfong 13y agoNote that this isn't unique to SAFE. If you're using a standard Clerky / YC note, the debt will convert into a mix of preferred and common to ensure there's no extra liquidation preference.
- clevy 13y agoCorrect - the notes had this feature too, except that rather than shadow preferred, it was the preferred / common "unit" concept. The net result was the same.
- frisco 13y agoWhat does this imply about the valuation of the company from an employee stock plan perspective? One of the nice things about convertible debt is that the investment is offset by an equal liability, providing a reasonable justification for continuing to issue stock to employees very cheaply. Does unencumbered cash (ie enterprise value) increase the risk of things like cheap stock charges? Can you use restricted stock with a safe or would you want to stick to ISOs and the 409(a) rules?
- clevy 13y agoGreat question. Re: the implied valuation of the company, I don't believe it will be different from the notes. The safe will convert to preferred stock, and while the price of the preferred stock certainly affects the price of the common, I think it would be hard to say that a prospective valuation for an event in the future increases immediately increases the value of the common stock.
- frisco 13y agoI guess I'm not asking about the implied cap from the future conversion into preferred, but the EV stemming from the mere ownership of, say, a million dollars by the company. We use restricted stock that vests by lapsing a right to repurchase, since it's cheaper for the employee (no cost associated with the option itself) and it starts the long term cap gains clock right away. This makes them a direct shareholder, though, and if the only stock outstanding in the early days is common, it seems like the cash-related EV would have to be attributed to it, right?
- rabbitonrails 13y agoStrictly speaking this should increase the common value relative to common under the equivalent convertible note because, as designed, the terms of the Safe are more favorable to common than a convertible note. However, like a convertible note, the Safe does not place a valuation on the company at the time of its issuance, merely a cap; and almost always it will be used only when no prior preferred round has established such. So for 409a appraisals, which, for seed-stage companies, rely heavily upon expectations about a future round, there will be relatively little impact. Namely the preference of the projected future financing will be slightly smaller relative to the note scenario, for the reasons detailed in this thread. This will increase the common value a bit, but not much. An exception might be if the appraiser bases his conclusions on a balance sheet metric that comes out differently without the liability you mention, which is not as common.
- beachstartup 13y ago> Safes should work just like convertible notes, but with fewer complications. it's not an option because the purchase price of an option is lost to the seller no matter what. it's not a loan because it doesn't have to be paid back on a schedule. so basically it's more like a convertible security deposit.
- tslathrow 13y agoNot a big fan of capital structure above common for early-stage investing. Too much possibility of fucking over the common. Why not bundle a non-expiring warrant with convertible preferreds? Consider also how much harder this will make private placements.
- sethbannon 13y agoAnd just like that the standard seed termsheet is born.
- bananacurve 13y agoThis appears to be in direct response to grellas comments a few days ago[0], but I find it hard to believe that even YC could operate so quickly so I guess it is just coincidence. [0] https://news.ycombinator.com/item?id=6849648 https://news.ycombinator.com/item?id=6849648
- not_that_noob 13y agoNice work, pg and gang, and keep things sane and simple for everyone.
- thatthatis 13y agoI'm glad YC is leading the charge to standardize and make sane very early stage funding terms. They've got market, brand, and brain power that is impossible for individual companies to match. The next thing I'd like to see out of YC legal is some sort of over-subscription pre-sale. Something like a combined participation right/"first right of refusal"/put option that companies can sell to investors when they are hot to guarantee their future access to funds.
- ChuckMcM 13y agoThis is the coolest financial instrument I've seen in a long time, ok ever. It makes me wonder if there is a way to craft something so that a WeFunder or some other crowd sourced funding group could build one with multiple people participating that would have a slightly higher liquidation cash preference and no stock. Basically it would work like this: A group of people pool funds to fund a SAFE note with a 2x cash liquidation preference. So the next time the company raises money, they set aside 2x (or 1.5x or what ever the note says) in equivalent cash to return to the SAFE investors. The SAFE contributors get a simple return (liquidation preference / time before liquidated), the startup gets lift off and a simple cap table (the SAFE vanishes after liquidation). It puts a cap on the return the SAFE investor gets in exchange for a somewhat lower risk (the company gets to its series A).
- clevy 13y agoI think with this idea you end up back at the note concept; what you are proposing sounds more like a loan / debt to me (if I understand you correctly?). The purpose of the safe, anyway, is to turn investors into stockholders at some point.
- ChuckMcM 13y agoWell a debt/loan without a term, more like an uncallable zero coupon bond without a maturity date, rather it has a maturity 'condition'. As you have clearly pointed out, one of the bigger issues with convertibles is that they change over time in terms of their impact on the company. The SAFE fixes that by getting rid of the debt/loan aspect, and this would do the same but bake in a fixed redemption price. An example, you get this thing (lets call it a BOOST), which is $100K with a redemption price of $125K. Now you startup goes 18 months, then does a series A raise for 1.125M$. They redeem the BOOST for 125K, pocket the $1M, and their series A investor gets their chunk of preferred. The 'rate' on our BOOST then is 25%/1.5years or 16.6% APR. Example 2. Same deal except the series A comes 6 months later. Now the redemption in only 1/2 year gives an effect return of 50% APR. Example 3. Company starts, grows to a going concern, runs for 5 years and then gets bought by BigCorp, and the BOOST is redeemed. Now its effective APR is 5% (actually less than that if you're not doing simple interest etc but it illustrates the point doesn't it?) Example 6. Startup goes poof and dissolves. BOOST is effectively at the head of the line on distribution of the asset value. Take $100K, divide it into $10K chunks, spread it across 10 different BOOSTS with other investors in them and spread the risk still further.
- danshapiro 13y agoTwo questions: - in the acquisition of a company with an MFN SAFE, it says that the instrument can convert in to common at the fair market value of the stock. Isn't that the FMV the purchase price? So isn't that the same as getting your original money back (no matter how successful the company may become)? Regarding pro rata rights it says: Do SAFE holders get pro rata rights? <snip> This pro rata right must be in either the Equity Financing documents or a side letter. Is this saying investors need to add pro rata rights to your SAFE, or that they only get them if the subsequent preferred financing has them?
- clevy 13y agoRe question 1: you read correctly. An investor just get its money back in a change of control. An investor using this form of safe would have to be very confident that the safe would be amended to match a later safe with better terms. To be perfectly honest, this form of safe may not be very popular for this reason, but uncapped notes with an MFN clause have been popular, so we decided to have a safe like that too. Re question 2: if the company has drafted its IRA to exclude the safe holders from pro rata rights, then the company must give those rights via side letter instead. Many investors feel very strongly about pro rata rights, so we drafted the safe to ensure that the company had to give them, but with some flexibility as to where (e.g., in a side letter rather than in an IRA).
- danshapiro 13y agoAha. It seems odd then to say that there are two choices in the case of MFN conversion, when they amount to the same thing. I know YC has seen MFN usage in the "everyone gets $100k" scenario, but I also could see them useful for family and friends rounds where an unsophisticated investor with a conflict of interest wants to put in the first $10k but not set a price. In that case, a default conversion might make sense as an option.
- DenisM 13y agoThis might be a good time to ask - are investors in general comfortables with notes vs. doing a priced round? I understand the advantages of notes, but I found that many investors don't like it. We had many who agreed to a modest priced round, but absolutely wouldn't do a convertible note, and yet Paul says most YC startups make do with the notes. There is a disconnect somewhere here. So am I the exception from the norm, or is YC the exception?
- deleted 13y ago[deleted]
- clevy 13y agoThe notes have proliferated because they are quick and easy (no transaction costs, etc.) so it's the way many startups like to raise money. Priced rounds are fine too - they just tend to take more time and involve costs. YC and others have open-sourced streamlined equity financing documents, but so far, nothing has been as easy as raising on a convertible note.
- DenisM 13y agoclevy, I literally said in my comment I understand the advantages of notes. I don't need to be convinced. Notes are great. My question is different - to what extent investors find note financing acceptable/appealing? Is it only YC companies that get the privilege? Is it a Silicon Valley thing, not used much elsewhere (like Seattle)? Is it used everywhere, and I just happened to be unlucky with it?
- bradleyjoyce 13y agoI can tell you the majority of angel investors in Dallas I've talked to that do not have experience with west coast deals do not like convertible notes. We closed a note with Dallas investors that DID have experience w/ west coast deals that featured a cap and a discount.
- clevy 13y agoSorry, DenisM. Investors in the Silicon Valley find notes very acceptable. It is not only YC companies that raise early money on notes, many other companies do too. Notes may be the most popular in SV, but I am sure that investors in other places use them as well. I think maybe you just got unlucky.
- adventured 13y agoI really appreciate what YC does in this regard. I raised venture capital from a large angel investor, and his team relied heavily on the YC documents ( http://ycombinator.com/documents/ http://ycombinator.com/documents/ ). I feel like it made the process a lot easier overall.
- joshpadnick 13y agoAnother significant benefit to not having actual debt is what happens if the company has been operating at a loss at the time the debt is converted. The IRS treats debt that is converted as "debt relief" which is equivalent to income, which is taxable. In the case of my company, when we raised our Series A, I converted from a single-member LLC to a C-corp, and wound up getting a tax bill for around $50,000(!) for the "debt relief", which was ultimately paid out of the proceeds of the money we raised, which in turn came out of the company's pocket. So, in the end, we wound up paying a "convertible debt tax" to the government. I'm actually surprised this comment hasn't come up yet; I would have thought the convertible debt tax would be somewhat common.
- kylered 13y agoFew questions... Does this give YC an ability to set a lower cap because it has reduced the investor upside in a forced conversion? If I were an entrepreneur, would I continue to raise multiple safe rounds and keep pushing the cap on the safe up? That would make the most financial sense to me as an entrepreneur. I'm not sure investors would want that, but it creates a large incentive for the entrepreneur. Why is a forced conversion bad? I always thought a timeline was a good incentive to create value for investors, and to optimize around timing your fundraise with your cap amount. How do you compensate investors for time value money if the deal takes a long time to get to the next round when there is no forced conversion or accrued component?
- mikeg8 13y agoThis sounds awesome. As a first time founder who was just about to close a small round on convertible notes, I realized what a pain some of the nuances with convertible debt were. Interest and maturity never really made sense to me from an investor perspective. I love that YC keeps raising the bar and works so hard to simplify life for both founder and angel.
- grellas 13y agoA few thoughts (apologies up front for the somewhat longish technical aspects of the discussion): 1. YC has once again managed to innovate in fascinating ways that help promote startups. And, it should be said, the legal work behind formulating this instrument called a "safe" is both sophisticated and commendable. It is at once simple and subtle and it covers a lot of nuanced legal technicalities that must have required some pretty careful thought to get right. The result should be extremely helpful to startups and their founders and gives founders one more powerful tool to use for their most important funding needs. 2. The safe enables founders to raise early-stage funds without having to do a premature equity round. The tax laws create problems for startups and their founders if they raise money from outside investors too early in exchange for stock grants. This typically winds up putting an unacceptably high price on the common stock, creating tax risks for all concerned and also lessening the value of incentives that can be offered to key people going forward (fuller thoughts here: https://news.ycombinator.com/item?id=6849648 https://news.ycombinator.com/item?id=6849648). If first outside funding is to be deferred, though, the perennial challenge becomes how to fund the interim process. 3. The convertible note meets this need by combining the attributes of debt and equity instruments. The investor loans funds to the company and the company signs a note promising to repay the principal with interest. If, however, the company can do a qualified funding before the note matures, the debt converts into preferred-stock equity on the terms struck with the equity investors at first funding, usually with a price discount, sometimes with a price cap, and typically with merger-premium protection for the converting noteholders for the added risk they take in being early in the game when risks are at their highest. In that case, the debt vanishes and the noteholder becomes an equity holder and everybody wins in terms of optimal positioning of their respective stakes in the venture: founders have gotten their cheap stock that they can hold until a liquidity event, at which time they can sell typically for long-term capital gains and with no intervening taxes to pay; noteholders have gotten their equity stakes with all protections and with no-less-favorable pricing than that offered to the preferred stock investors who presumably have negotiated a good, arms-length deal for themselves; the company avoids a too-early high repricing of its stock so it can continue to offer good incentives to new team members as they join; and the company does not usually have to fool with 409A valuations or with other strings and formalities attending the bringing in of investors via equity rounds. All of which is great. But debt is debt. And, unless and until a first funding occurs, it must be carried on the balance sheet as debt. Debt also carries interest. And when it comes due, the noteholder has a legal right to sue for its repayment if it is not paid. If the noteholder wants to extend the term, a series of formalities are required to do so and, in their absence, the parties stand at legal risk. 4. The convertible note supplanted an earlier form of convertible note used many years back by which individual investors would see startups as being much akin to small businesses and would loan the money to the venture with the primary aim of making a good interest return on their investment. This might be called an "optional convertible" note and I remember doing many of these back in the day as a lawyer. That sort of note saw the conversion right as a privilege belonging strictly to the noteholder. In the normal course, the debt was expected to be repaid with interest. It might even be secured with the company's assets as collateral. It might be personally guaranteed by the founders. These were all the normal lender protections expected by those who had the investment mindset of that day. The conversion was there as an added perk only: if the company happened to do very well, then the investor could forget about the debt as such and could instead elect to convert it into equity (very typically common stock and at a price set up front, at the time the note was signed). So, for instance, an investor would loan $50K at 10% interest at a time when the company had little value but could elect to convert at, say, $.50/sh at any time in the sole discretion of the investor. The mindset in this era, then, was primarily upon the debt as debt but with an equity kicker to cover long-shot cases. 5. This mindset all changed during the bubble era, when convertible notes came in to help solve the early-stage funding problem. With its "forced conversion" element, it not only combined the elements of debt and equity but did so with equity being the main focus of the investor. Few if any investors by that time were primarily interested in being repaid the debt owed by the company. The equity upside motivated the investment and the debt came to be seen as added insurance just in case the venture did not pan out as hoped. Because of its force-conversion attribute, it was regarded under law as a "security," which basically means that the investor casts his lot primarily with the managerial efforts of company management while forgoing legal rights intended to protect a debt-type investment. 6. The safe seeks to confer the benefits of a convertible instrument without carrying with it the baggage of debt. It would thus be regarded under law as a "convertible security." That means the debt protections largely go away for the investor and the investor places his bet almost entirely on the efforts of company management. Thus, if this instrument achieves widespread adoption, the investor mindset will have evolved over the years from "loan with equity kicker" (old form of optional convertible note) to a convertible-note-style security instrument with true loan features (today’s conventional convertible note) to a pure convertible security (the safe). 7. I think it should work beautifully in the YC context. Whether it will achieve widespread acceptance or not will depend on investor expectations. I am not so sure. After all, the earliest investors do take the biggest risks. Is it enough to compensate them with a discounted price or price cap at conversion? If I were to guess, I would say that it is enough in the YC context. But it will be interesting to see if investors generally come to feel this way. In effect, the safe does leave founders saying to early investors, "Give us your money and but wait on getting your equity: if it goes well, you get equity; if it does not, you get nothing and you have almost no rights." Apart from a very vibrant context such as YC, where investor demand is already high, I am not sure how well that will sell when all the investor needs to say in response is, "how about us just doing a convertible note instead." I personally believe that for the general range of cases the pull toward a conventional convertible note will be very strong, and founders will have real difficulty convincing investors why they should forego the benefits of a convertible note in favor of a convertible security where the only advantages to the latter lie strictly with the company. But who knows? The YC magic has worked before to transform investor mindsets (I vividly remember how horribly out of favor convertible notes were just a short while back) and it may work this time too. Whether it does or not, we can all be thankful that YC is doing great and innovative things to add to the vibrancy of the startup world, and the safe is one more thing to add to the list (kudos to their excellent lawyers as well).
- crassus 13y agoIt's incredible how much of the law is just codifying standard practice. It's when you try to do something new that you run into trouble. Regulation is so thick on the ground that operating in an unregulated industry is considered a business risk, because you know the regulation is coming, but you don't know what it will be. There are rules for everything.
- SilasX 13y agoCan someone give the short version? 1) What is the current problem with convertible notes? 2) How does this solve that?
- balls187 13y agoDepending on whom you ask (Investors or Founders), Capped notes have a different set of negatives. From the article, this new financial instrument is attempting to solve the problem that Convertible Debt has a set of restrictions: term limits and interest rates close to market rates. This causes lead to complications, when the note converts, or when the term expires. This solves it by no longer issuing "debt", but instead the right to buy stock at an agreed price. This is similar to a Warrant, which is typically used for advisor compensation.
- malandrew 13y ago"has the advantages of convertible debt without some of the disadvantages." For which counter-party? The startups or the investors?
- dennisgorelik 13y agoIs buying SAFE similar to buying CALL option?
- cominatchu 13y agoI have a question about using this. In the SAFE Primer it states: "The table below sets forth a comparison between the Standard Preferred and the SAFE Preferred, as each would be described in the company’s certificate of incorporation:" Reading the SAFE it mentions "SAFE Preferred Stock" and seems to partially define it. Does this mean you must have "SAFE Preferred stock" defined in your articles of incorporation to use a SAFE, or can the SAFE stand alone?
- clevy 13y agoThe SAFE Preferred Stock would be whatever you end up calling it in the charter - for example, Series AA (just something to differentiate it from the preferred stock being issued to the new money investors). So no, you would not actually call it "SAFE Preferred Stock" in your COI. Does that make sense?
- cominatchu 13y agoYes thanks, so if the articles just authorize the issuance of common stock one needs to amend them before using a SAFE?
- pg 13y agoIncidentally, the clevy whose responses you see on this thread is safe author Carolynn Levy.
- spintongue 13y agoPls help trend and promote this site. Itz the best thing to ever happen to the entertainment industry. www.thescreechersworld.blogspot.com.
- rhc2104 13y agoThe SAFE looks great. But one question is, shouldn't SAFE holders have the right to veto a dividend? While this would be sociopathic behavior, what would stop this from happening? 1) Start company 2) Raise 1 million dollars on SAFEs 3) Distribute 1 million dollar dividend 4) Dissolve company