|#553 MWAVC| — Mastering the SAFE note 💸
...because you're likely to sign one, if you invest in startups
Hi,
Welcome (back) to MWAVC for my 553rd post on finance, investing, venture capital and all that jazz. My name is Ato (more about me here and here). I tried to write every single day, inspired by Seth Godin (Seth’s Blog) and Fred Wilson (AVC) but the schedule got crazier and I had to pull back a bit. So please set a reminder to read these newsletters on Mondays, Wednedsays, Fridays and Sundays 😬
In case you’re new here, quick introduction: I’ve been investing in some way shape or form for the last 12+ years and now work with one of the pre-eminent VC firms in Africa - Microtraction, and the family office that acts as the GP - Pave Investments. Read more on us here and here. Much of the writing I’ll share here are based on things I find interesting that I’d like to share and hear your thoughts on. This is also an outlet for my thoughts, lessons, asks etc. and I think you’d find most of it valuable if you’re remotely interested in learning about venture capital.
I’ll be developing the content further, including things I think will be helpful and would appreciate any feedback on what’s working vs. not, and what could be helpful for you over the long term. If you’d like to sign up, you can do so here. Or just read on.
Some smart founders just picked my email and decided to add me to their investor updates. I suggest you do too 😉
Mastering the SAFE note 💸
Shoutout to Kevin for putting this summary on SAFE notes together and sharing on his LinkedIn. Valuable information founders need in their toolkit as most investment agreements are done via SAFEs these days.
Unlike conventional instruments, SAFEs don't neatly fit into either the debt or equity category, and they don't accrue interest. This will prepare founders to confidently approach investors and secure funding through a SAFE Note in the future.
Five Different Types
Fixed Conversion at a future date
Valuation Cap, no discount
Discount, no valuation cap
Valuation Cap & Discount
MFN (Most Favored Nation)
Example: Seed Round
Investor invests $25,000 with a $5m Valuation Cap, 20% Discount.
Pre-money valuation of the company $10m
Number of Shares= 2m
Share Price= $10m/ 2m= $5
Option 1 (Discount)
Share Price after discount: $5 * (1 - 20%) = $4
Total Number of Shares: $25,000 / $4 = 6,250 shares
Option 2 (Valuation Cap)
SAFE Investor choosing $5m valuation cap
Share Price= $5* ($5m Valuation Cap/ $10m pre-money valuation)= $2.50
SAFE Investment= $25,000
Total Number of Shares= $25,000/ $2.50= 10,000
SAFE Investor will apply the Valuation Cap option; $2.50/ share.
Finally, the total number of Shares for SAFE Investor= 10,000
Share Price at Seed $5
Share Value of SAFE Investors= 10,000*$5= $50,000
SAFE Investment= $25,000
Unrealized Return= (($50,000- $25,000)/ $25,000)* 100%= 100%
Scenario 2
VC Firm Invests at a Pre-Money Valuation = $6 Million
Total number of shares 2m
Share Price= $6 m/ 2m= $3
Option 1 (Discount)
SAFE Investor Choosing Shares at 20% Discount
Share Price= $3*(1-20%) = $2.4
Total Number of Shares= $25000/ $2.4= 10,417
Option 2 (Valuation Cap)
SAFE Investor choosing $5m valuation cap
Share Price = $3* ($5 Million Val Cap/ $6 Million valuation) = $2.5
Total Number of Shares= $25,000/ $2.5= 10,000
SAFE Investor will apply the Discount; $2.4/ share.
Total number of Shares for SAFE Investor= 10,417
Share Price at Seed = $3
Share Value of SAFE Investors= 10,417*$3= $31,251
SAFE Investment= $25,000
Unrealized Return= (($31,251- $25,000)/ 25,000)*100%= 25%
The higher the Valuation Cap in the SAFE round, the better it is for the Founder, resulting in a lower dilution of Equity provided the Founders are confident to close the next round at a higher than the valuation cap.
MFN Clause
Let’s say SAFE A has an MFN Provision.
If a new SAFE B is issued, the company has to tell SAFE A about it.
If the terms of SAFE B are better for the investor than SAFE A, then SAFE A can ask for the same terms as SAFE B.
Currently Reading 🎒
Got a great book recommendation from a friend this past weekend: Scary Smart: The Future of Artificial Intelligence and How You Can Save Our World by Mo Gawdat. I may have to get into audiobooks because I’ve got so many good recs coming my way and I simply can’t wait to get my hands on a physical copy. Any tips?
Currently Listening 🎧
Michael Jordan and Kobe Bryant on Founders.
I hope this is helpful to some founders out there. I’m happy to speak more on this with anyone looking to build a company and wants feedback.
Remember: “Until the lion learns to write, every story will glorify the hunter.”
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Till next time,
AB