Orange County's Virtanza Increases Preferred Stock Offering
New Accelerate OC Podcast: CEO & Managing Partner of Silicon Foundry

A Closer Look at the Post Money SAFE Cap and Discount

An article we liked offering a Plain English, line-by-line explanation of Y-Combinator's post-money SAFE fundraising agreement from Thought Leader Alexander Jarvis:

Post Money SAFE Cap and Discount Explained Line by Line

Tl;dr: SAFE cap and discount version of the Y-Combinator post-money SAFE financing document explained line by line explanation.

Post Money SAFE Cap and Discount Explained Line by LineIf you are planning on raising an angel/seed round with a new post-money SAFE you need to know what is in the legal agreement. You aren’t a lawyer, so I’m going to explain the whole document in simple English.

I’m going to cover each of the 5 documents that Y-Combinator offer. If you are going to use another one, you can link to the right blog here:

All quotes are the exact wording of the SAFE documents. Everything else are my comments. For idiots, this is not legal advice, I take no responsibility for any losses, get a lawyer, yada yada.

For syntax, I’m going to assume you raise at a series-A. That’s the word for the qualified financing round I am going to use.

Note: there are a number of places where there are numbers involved. I’m not going to nerd out here on how the math is done. Instead, I made a model with the math done. Download the model and you can see how the math is done. You can read the blog here.

Investor warning

THIS INSTRUMENT AND ANY SECURITIES ISSUABLE PURSUANT HERETO HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES.  THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED IN THIS SAFE AND UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM.

This is a warning to investors. It’s boring. You don’t care.

It basically says that only sophisticated investors can and should invest in startup land and they can’t sell off their investment to other people.

Company name for the SAFE Cap and Discount

[Company Name]

You need to input your legal name. It’s one of only 7 fields other than signature stuff you need to fill in.

How much the investor is investing

SAFE

(Simple Agreement for Future Equity)

THIS CERTIFIES THAT in exchange for the payment by [Investor Name] (the “Investor”) of $[_____________] (the “Purchase Amount”) on or about [Date of Safe], [Company Name], a [State of Incorporation] corporation (the “Company”), issues to the Investor the right to certain shares of the Company’s Capital Stock, subject to the terms described below.

You need to input:

  • The investor name. E.g. Sequoia
  • The amount in Dollars the investor is investing. E.g. $200,000
  • The date you are signing this document and it comes into effect. E.g. 1 January 2020
  • Your company name. E.g. Uber
  • The state you are incorporated in. E.g. Delaware

This says that for an investment in the SAFE Cap and Discount, the investor gets shares in your company as will be set out in a minute.

Don’t change the document

This Safe is one of the forms available at http://ycombinator.com/documents and the Company and the Investor agree that neither one has modified the form, except to fill in blanks and bracketed terms.

The new post-money SAFE Cap and Discount makes an effort to say that no one can change the document other than in the brackets. The goal is to restrict changes so you don’t need a lawyer. Everyone knows it is the same. If everyone is ok with the SAFE in principle, there are no other changes to make. There is no funny business!

Setting the cap

The “Post-Money Valuation Cap” is $[_____________].

You need to input:

  • The cap in Dollars. E.g. $500,000

The valuation cap sets the ceiling on the price per share they will pay at the series-A round. You are setting a valuation with this structure if you weren’t aware of the fact.

The additional defined term you want to notice is: “Safe Price” means the price per share equal to the Post-Money Valuation Cap divided by the Company Capitalization.”

That’s how the price per share is calculated.

Setting the discount

The “Discount Rate” is [100 minus the discount]%. See Section 2 for certain additional defined terms.

You need to input:

  • The cap in Dollars. E.g. $500,000

The discount is a discount for the SAFE Cap and Discount investor on the price that a series-a investor pays. If the series-a investors pay $1.00 per share and there is a 20% discount, then the SAFE investors convert at $0.80 a share.

It is incredibly important to know that the SAFE defines a “Discount Rate”, not a discount. You don’t type in  20%, you insert 80% (1-20%). This just means...

Read the rest of this article at alexanderjarvis.com...

Thanks for this article excerpt and its graphics to Alexander Jarvis.

Want to share your advice for startup entrepreneurs?  Submit a Guest Post here.

WHAT’S YOUR NEWS? - Does your company have articles, events, or announcements to share?

Submit your news, deals, opinions, or job listings here for FREE PUBLICITY.

See the Directory of OC Startups hereJoin the OCSC to get your company listed, too!

AND - Subscribe for FREE OC Startup News here!

OR, WHAT DO YOU THINK?  LEAVE A COMMENT BELOW!

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Comments are moderated, and will not appear until the author has approved them.

Your Information

(Name and email address are required. Email address will not be displayed with the comment.)