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- ☕️ Fixing the YC SAFE
Today’s Menu ☕️
👋 Hi, Breakfast Club Members!
I’m in LA this week - if you want to chat about legal stuff (I’m a startup lawyer @ Optimal) or your fundraise let’s get coffee.
Scroll down for a brief essay on how to make the YC SAFE more founder friendly (a small tweak can save you millions).
Also, thank you to Theron from Citizens for sponsoring today’s newsletter. Talk to Theron for Startup Banking
LOS ANGELES
Venice Tech Breakfast Club - March 19th
Back again but this time with a link that should work for everyone.
I’m hosting the next LA Tech Breakfast Club in Venice. Teaming up with Jacques Sisteron from Upfront. He focuses on early stage hard tech.
NYC Tech Breakfast Club March 21st
March NYC Tech Breakfast
If you’re a Founder or VC, come hang with me. Headcount is going to be extremely limited for this one. Just founders and VC’s.
This month we’re celebrating Fil Aronshtein, founder of Dirac. I’ve never been so excited about manufacturing - you should check out what they have cooking with BuildOS, the first automated work instruction platform.
Citizens
I would like to give a big thank you to the startup banking team at Citizens. If you came to the most recent Tech Breakfast Club in New York, you might have had a conversation with Theron - if you’d like to chat further, shoot him an email: |
Fuel your growth and pursue each milestone with a set of financial products and services built for your innovative company. Enjoy a dedicated, empowered point-of contact and a team of experts who can proactively address your needs and collaborate with you to develop customized strategies to help your business succeed. |
Member Spotlight
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.