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- ☕️ How to fix the YC SAFE
Today’s Menu ☕️
NYC Tech Week Events (Return the Fun(d) returns)
Clerky Partnership
Why the YC SAFE might cost you big and how to fix it
👋 Hi, Breakfast Club Members!
NYC Tech Breakfast Club this week was rowdy as always. Lot’s to celebrate!
Shoutout to super cohost Rachel Braun!
We’re back this Wednesday with a special AI edition of Tech Breakfast Club. If you’re an AI/ML leader/CTO come join!
After that it’s NY #TechWeek - still have some opportunities to get involved as a sponsor if you want to support the Tech Breakfast Club community
Also, thank you to Clerky for sponsoring this edition of the Tech Breakfast Club Newsletter. Clerky is how the best startups get legal paperwork done!
Reply to this newsletter to get the TBC Clerky discount.
Tech Breakfast Club Events
AI Focused NYC Tech Breakfast Club May 22nd with Julien Reiman from Baseten. Mainly open to CTO’s and Machine Learning Leaders in New York
SF Tech Breakfast Club June 18th with Jack McClelland
LA Tech Breakfast Club June 20th
Clerky 🤝 Tech Breakfast Club
Shoutout to the Tech Breakfast Club Members who have already taken me up on this offer!
I’m beyond excited that Clerky and Tech Breakfast Club are partners. When you’re ready to start your company, email me (or reply to any TBC newsletter), and I’ll invite you to a special Clerky portal - as a Tech Breakfast Club member, you’ll save $100 on Clerky’s already reasonable fees.
Whenever a founder comes to me for legal services and I find out that they’ve incorporated with Clerky, I breathe a sigh of relief. I love Clerky and trust their documents. As a lawyer, it saves me a ton of headaches if you just use Clerky and get formation done right the first time.
Tech Breakfast Club NY Tech Week Events
Return the Fun(d) Tech Week Party Friday June 7th. We’re back with unprecedented amounts of DPI. Join me, Ariana Nathani from Drinks First, and hundreds of other Tech Breakfast Club members for a blowout party.
Wednesday Evening Standup Meeting with Underground Overground Comedy, June 5th. Sponsorship is available -
NYC Tech Breakfast Club Meetup (BIG) Wednesday, June 5th, with Kate Chichi of Founders Club
NYC Tech Breakfast Club Meetup (small) Thursday, June 6th with Lori Berenberg of Bloomberg Beta
VC Golf Outing (10 out of 20 slots filled) Wednesday, June 5th. We’re playing Bayonne GC! This might be the sickest thing I’ve ever put together. If you want to sponsor a group - we’ve got a little space left.
Startup Law
Fixing the YC SAFE
For the record, there’s a lot to love about the Y Combinator post-money SAFE.
It delivers far more clarity to investors over how much of the cap table they’re buying. If you invest $1m on a $10m post-money SAFE, you get 10% of the company today.
The problem, and this has cost founders enormously, is the extreme level of anti-dilution protection built into the post-money SAFE. Any SAFE’s you issue after the post-money SAFE round, but before the Series A, do not dilute the investors – they dilute only the common stock (founders and employees). This is true even for the 2nd and 3rd round of SAFEs in an up-round with a higher valuation cap.
This is too generous to investors. Even in the most investor-slanted equity rounds, you’ll never see full anti-dilution protection for post-closing investment. Why should post-money SAFE investors get that?
To give a high-level idea of the economic implications, take a look at this scenario:
SAFE Round 1: $5M pre-money cap or $6.5M post-money cap ($1.5M invested)
SAFE Round 2: $10M pre-money cap or $12M post-money cap ($2M invested)
Series A round: $25M pre-money, $31M post-money ($6M new money), 10% post-available pool.
In Series A dollars, common stockholders lose $912,000 in moving from the traditional pre-money SAFE to YC’s preferred post-money SAFE. Fast-forward to an exit years later, and you’re losing millions or even tens of millions of dollars in value.
Now if you eliminate the hidden anti-dilution protections from the YC SAFE, common stockholders gain approximately $1.2m in series A value; which again could be worth easily an extra >$10m by exit.
If you’re interested in seeing a redlined version of the YC SAFE with the suggested changes, respond to this newsletter and I’ll share it with you. And if you’d like to go through the math, I’m happy to chat. Some minor tweaks now can make a material difference when it comes time to exit.
About Morgan
Morgan, besides running Tech Breakfast Club, is a Startup Lawyer at Optimal, an elite lean boutique startup law firm repping clients funded by a16z, Sequoia, Kleiner, Accel, and countless other VCs. He works with clients from formation to exit, in collaboration with Optimal’s partners.