Simple Agreement for Future Equity (SAFE): Cap, no Discount It is a short-term debt financing instrument. Input the Principal, Valuation Cap, and Discount. Using the assumptions above, the price per share for the new investors would be $6.57 per share (mathematical result to arrive at 20% ownership) and the conversion price for the notes or Safes would be $4.60 per share ($6.57 minus the 30% discount). This convertible note was created by 500 Startups as an alternative to the SAFE and standard convertible note. Example 2: a VC invests $2.5M on a pre-money valuation of $4M. Post Money SAFE — Math Problems. We just had another YC ... An automatic conversion discount with a price cap might look something like this: "The notes shall convert at the lower of (i) a 20% discount from the Series A price, or (ii . Developed in collaboration with Y Combinator. This is because the $1 million is 5% of $20 million, and 5% of 10,526,315 is 526,315. Suppose XYZ LTD raised $50,000 from Mr C by issuing a SAFE with a $5M valuation cap and 40% discount. Note that an investor investing that same $10,000 directly in the Series A round at $10 per share would only be issued 1,000 shares. Created by Equidam and free for everybody to use. These notes are issued in the initial stages of a company. 6 Major Differences Between Convertible Notes ... - Alcor Fund The valuation cap in the n e w SAFE is . If the valuation cap is a post-money valuation cap, then it will be 10,526,315 shares. If, at the Series A, the startup raises money from a venture capital firm that invests at a pre-money valuation of $10M with a per share price of $5.00 IF we apply the discount, the price per share would be $4.00/share ($5.00 times . A SAFE note is a convertible security that, like an option or warrant, allows the investor to buy shares in a future priced round. 3. Scenario 3: No Valuation Cap, 20% Conversion Discount. Now let's compare the Post-close Series A cap table between the Seed Equity v. the Seed Note/SAFE scenarios. Instead, it would include a discount that would be used during the conversion of the note. Now watch what happens if we drop the pre-money valuation to $6 million: Applying the discount, the conversion price, of course, stays the same at $.80; but when we divide $5 million (the cap) by . First of all, founders need to start . (See my related articles titled "Justifying the Cap Amount in Your Convertible Note" and "Negotiating Valuation") Two $50k Safes on a $1M post-money valuation = 10% dilution. The longer the convertible round represents in terms of runway the more the cap should likely be a proxy for valuation at the time of such convertible note investment. Thus, an automatic conversion discount with a price cap might read something like this: Similar to Example 2, the Safe instrument converts into preferred stock at a price per share determined by the equity financing pre-money valuation divided by company's fully diluted outstanding shares. For example - $50k Safe on a $1M post-money valuation = 5% dilution. It then converts into equity in that company at a trigger event. Rather than converting at $1 per share, as in Scenario 1, the angel investor can convert her shares at $0.80 per share ($1 x (1-20%)). Next, we apply the discount to the new investment valuation, which in this case is $5,000,000 * (1-.2) = $4,000,000. The maturity date is when the note expires. Answer: A valuation cap applies to convertible notes and SAFEs. The less charitable view is that the elimination of the discount in Notes/SAFEs is a cynical power grab, pure and simple. As of March 2021, we're unveiling beta versions of the "Valuation Cap, no Discount" post-money safe and optional side letter for companies formed in Canada, the Caymans and Singapore. Investor has purchased a safe for $100,000. the Conversion Cap: $4M. Using a SAFE means, technically, you can delay valuing your company. Cons: SAFE investors assume most, if not all, of the risk, in that there is no guarantee of any equity ownership in the company. You invest $25k in a startup's seed round using a convertible note with a $5M cap, 20% discount 2. an additional $2M on the same note a year later. Issue safes or convertible notes to seed investors, after doing a free board consent to authorize the seed financing. (Share price, converted shares and Ownership percentage will populate automatically when the model runs calculations.) Go read it - I'll wait.Or, if you just want the paragraph, it's: "If this note converts at a price higher than the cap that you have been given you agree that in the conversion of the note into equity you agree to allow your stock to be . Now let's suppose a company raised its seed round by issuing a convertible note that had no valuation cap but did have a 20% discount to the Series A round. Valuation Cap - More commonly known as cap, it's the maximum valuation that the investor will be valued at if the SAFE already converts to equity. A SAFE note (simple agreement for future equity) is a convertible security that acts like a warrant which allows the investor to buy shares in a future priced round. Similar to a convertible note, the Safe can be tailored to include a valuation cap, a discount or both (or neither), allowing it to be easily customized for the investor. A discount reduces the price per share for the SAFE note holder when the company actually starts selling stock. ディスカウントはいうまでもなく、割引のことです。次のラウンドにおいて SAFE 投資家は、それ以外の投資家が購入する価格に比べて一定割合ディスカウント(割引)された価格で取得することができます。 The discount price generally refers to the price per share of the equity or liquidation event multiplied by the discount rate. Here's a quick, skimmable glossary of terms to understand in a safe term sheet. SAFE notes don't require filling with the . The valuation caps are the only negotiable detail. Valuation Cap (optional): The valuation cap sets a maximum value at which a convertible security will convert into equity in the financing round. The Valuation Cap is the most important term of a convertible note or a SAFE. The company's fully-diluted outstanding capital stock immediately prior to the financing, including a 1,000,000 share option pool to be adopted in . A convertible note is a capital raising instrument that acts as a debt in the form of a loan made to the company. It derives from a belief that early rounds in hot . SAFE: Discount, no Valuation Cap - In this post-money SAFE note, there would not include a valuation cap. This process protects investors against dilution should the starting valuation of the company increase significantly between funding. If we imagine that the new investors are paying $1/share, your note holders are paying $0.30/share, for something that has a $1/share preference value. As debt instruments, convertible notes also come with a maturity date and fixed interest rate. SAFE notes offer this advantage to investors through discounts, valuation caps, or both. This price cap is expressed in terms of a pre-money valuation and effectively acts as a share price ceiling. Discount - This refers to the discount that the venture capital firm, angel, or startup could get at the next financing round's valuation. In order to determine the valuation that will be applied to the SAFE note investment, we need to determine whether the cap or the discount will be used (it is not standard practice to use both). The Discount Rate is like a Nordstrom coupon that says "pay 80% of the retail price" instead of "get 20% off the retail price." Valuation Cap. It's called an uncapped note. However, it's pretty hard to negotiate for! However, it's pretty tricky to do in this environment with either instrument, so there is no clear winner for seed investment in this category. It accounts for a possible change in company . It sets the maximum company valuation at which the notes will convert into equity (e.g. So, instead of capping the valuation at say $6 million, it says there's a 20% discount on the series A price. Both instruments offer the investor the better of the discounted valuation (using the stated discount) or a pre-negotiated valuation cap, whichever is more favorable at the time of conversion. This is logical from a pure . The valuation cap of a SAFE sets a contractual ceiling on the pre-money valuation that will be used to calculate the price at which an investor's SAFE converts to equity at the time of a future conversion event. The conversion price for the Note/SAFE is calculated by $6MM (valuation cap) / (5MM Common Stock + 1,530,476 Pool) = $0.92. The conversion price for the Note/SAFE is calculated by $6MM (valuation cap) / (5MM Common Stock + 1,530,476 Pool) = $0.92. This tool provides a template for a Simple Agreement for Future Equity (SAFE) with a valuation cap and no discount rate, also known as a "Standard SAFE" and can be adapted to suit your organization's needs. The discount means the future equity round valuation can be higher than the cap and the investor will still convert at a valuation that's lower than the cap. The series A investors got 17% of the company and the founders and seed/angels got the rest. So, there may be the concept of a discount instead of a cap. Concepts you should have learned: convertible notes, SAFEs (and discounts) pre money vs post money valuation; dilution; up, down & even rounds; the absolute basics of a cap table The Valuation Cap is $8,000,000 and the Discount Rate is 85%. Difference between SAFE and Convertible Notes Valuation Cap: The maximum valuation investors will convert their investment into equity in the next round. This makes sense, and could be valuable, but it cuts against the grain of founder/investor thinking and requires some distinct term sheet changes to take full advantage of it. The KISS might or might not have a maturity date or interest rate. SAFE's provide the company with an obligation to deliver a variable number of shares based on a future unknown priced round (discounted) or a valuation cap. Answer (1 of 3): The valuation cap in a SAFE is generally the same as the valuation cap in any other convertible security. Under the old SAFE agreement, the company will have effectively raised $4M on $8M pre / $12M post with . In addition to lacking a valuation requirement, like convertible debt, the SAFE deal terms can include valuation caps and share-price discounts to give early crowdfund (CF) investors a lower price per share than later venture capital (VC) investors or acquirers in that liquidity . Note that in this scenario price per share for the convertible note or SAFE using the valuation cap would end up being greater than that which would result by applying the discount rate (remember that the discount rate would be the traditional equity financing price per share discounted by 50 percent, here, $0.50 per share). Input the Principal + assumed interest to be accrued, Valuation Cap, and Discount. Customizations may also include additional protections for major investors, such as rights of first offer (ROFO) , observer rights , information rights and other rights. 2.Discount, no Valuation Cap:ディスカウントあり方式. The glossary is built so you can follow along — each term is listed in the order it appears in Y Combinator's Safe: Cap and Discount term sheet. Integrated checklist helps you keep track of the status of each investor, including whether you've received their funds. For example, imagine a stakeholder invests $10,000 in a company valued at around $1,000,000 (Note the convertible owner . We take the discount: divide 1,000,000 by 0.8 giving us a note value of $1,250,000. A SAFE is a capital raising instrument under which an amount invested by an investor will convert into . But it does have a discount rate, a valuation cap, and a QFE of one million dollars. A valuation cap is pre-money : the 'cap' or limit is placed on the starting valuation of the company before the financing round. How is a SAFE Note Similar (and Dissimilar) to a Convertible Note? Model priced funding rounds with convertible securities to understand founder dilution in LTSE Equity. If the valuation cap is a regular valuation cap, then the fully-diluted capitalization used for the safe conversion will be 10 million shares. SAFE investors do still receive the benefit of a discount and/or valuation cap (similar to convertible promissory notes), which can add significant value to an investment. The company has negotiated with investors to sell $1,000,000 worth of Series A Preferred Stock at a $10,000,000 pre-money valuation. This lowers the effective pre-money valuation to $2,750,000 and dividing that valuation by the number of outstanding shares we get a price per share of $2.75. Let's look at a convertible note example with a $4M cap and a 20% discount. 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