Standing in a crowded auditorium surrounded by hundreds of other founders and investors, my heart racing as I shook hands with someone I had just met.
They had just signed up to give us $50k.
That this had happened, perfectly legally and safely for both sides, in under 10 minutes was blowing my mind.
This was YC’s Demo Day, and the latest fundraising doc - the YC safe - had made life so much easier for founders.
The last thing you want to do when you are raising money is attempt to review legal documents yourself or spend a small fortune on lawyers.
The good news is that you probably don’t have to, thanks to the YC Standard SAFE.
The introduction of the YC SAFE in late 2013, changed the game for pre-seed and seed fundraising.
So if you are not familiar with the SAFE, I’m going to give you the rundown on why you should use it, but more importantly how to use it, and some things to watch out for.
Let’s get to it. 🚀
The YC safe made fundraising so much easier for early stage startups. Before the SAFE was introduced in 2013, founders would typically raise money using a convertible note.
To put it simply, both a safe and a convertible note are agreements for the investor to give you money now, in exchange they will get equity at some point in future - typically when a startup raises a priced round.
They are meant to be more straightforward than trying to figure out what a fair price for the shares of a startup would be at this stage.
Convertible notes are still used, but have fallen out of favour. And for good reason. If you have the choice as a founder, you should avoid them because;
a) a convertible note is a loan that carries interest.
b) they’re more complicated, with more terms to figure out and less standardisation.
c) there’s a variety of scenarios that could trigger the equity conversion.
You have to worry about interest rates, maturity dates, and being pushed to raise a fundraising round on a timetable you might not control.
If you make a mistake in raising with a convertible note, it’s possible to end up bankrupt.
If you make a mistake with a YC safe, the worst that can happen is you have given away slightly more of your company than you intended.
If that didn’t convince you to use the YC SAFE to raise money, I don’t know what will.
How to use the YC SAFE
The S in safe stands for simple. And it really is simple at only 5 pages long, and about a page of that is just definitions. Because it’s so short, there’s no excuse not to take the time to read it.
You can grab your own copy from the YC website here.
Once you have your copy of the safe, there’s only a couple of things you will see need to be filled in.
How much is the investor going to invest
What’s the valuation cap.
It’s worth noting you can also have three variations on the safe, a discount, and an uncapped safe, and uncapped with an MFN clause.
A discount basically says that the investor will get some % discount on the priced round. And uncapped safe means that the price will get convert at whatever the priced round converts at.
Uncapped with an ‘most favoured nation’ MFN clause, basically says that even if we don’t include a cap this time, if you later decide to include a cap, the investor will always get the same terms as the best terms you have offered to other investors.
But most of the time, you can stick with a standard safe with a valuation cap and no discount.
Putting these variations aside, lets talk about the actual mechanics of signing a SAFE.
Go to the YC website and download the version you want here. Probably the version with a valuation cap and no discount.
Make a copy of it and add the investor’s name, purchase amount, and the valuation cap you have agreed.
Add your company details and make sure the investor signs at the bottom. You can use electronic signatures using Docusign or similar.
That’s it. That’s all you need to do. If you don’t change anything, you don’t need lawyers to review it.
In fact you can hopefully avoid lawyers completely.
One thing to note.
What you will get from the YC site is a ‘post-money safe’, which means the valuation cap is calculated to include the investment amount.
For example if you are receiving $500k on a $5m valuation cap, this implies the safe holder owns 10% of the company.
For lots more detail on this and the difference between the previous ‘pre-money safe’ you can check out the full guide from YC here.
Now, let’s talk about the two things you do need to agree.
How the heck to choose your valuation amount?
First, the amount being invested in the company by the investor. This is pretty straightforward, because many investors will have a standard amount they invest, say 50k or 250k.
You can of course try to persuade them to invest more.
The second part, the valuation cap, requires a bit more thought. Investors are going to ask you “what valuation are you raising at?” And you need to have an answer ready.
The great thing is, at the pre-seed and seed stage company level, you do not need a degree in economics to decide on a valuation cap.
In fact, valuations at the pre-seed and seed stage are driven almost entirely by market demand. What does that mean for you in deciding your initial valuation?
It means what you should do is find out what other people are raising at in your stage and industry, and see how you compare. If you think you are in a better position than many of them, start raising at the top end of the range. If you feel like you are not in such a strong position
You can literally choose a number.
Yup, you can choose a number, and nobody’s going to say “you can’t do that”.
Now, if you get the number too high, you might not be able to raise. If you put it too low, you will give away too much of your company.
You want to be seen to be ‘in touch’ with the market and so if you choose a number that’s way to high or way too low you won’t be taken seriously.
We’ll talk more about how to think about this more deeply, but for today we’re going to keep it simple. Choose a number that’s not wildly different from similar stage companies in your industry.
So you’ve got your valuation, and you have your amount invested. This is everything you need to know to go ahead with your investor.
You are now ready to use the YC safe in your fundraising.
One final thing to note, which is quite cool, is that no transfer of money has to actually take place. I’ve even heard of some people giving safe’s for certain amounts to folks that have been helpful to them such as advisors.
Now, if you do this a lot your cap table is going to get messy, but it just shows how powerful this simple doc is and the creative things you might be able to use it for.
As investors have become more comfortable with the SAFE, if you are using the standard docs from YC, you can get them signed in just a couple of minutes, literally.
Back to the story from the beginning. In 2015, I was pitching at the summer demo day, which took place at the Computer History museum in Mountain View.
So after the pitches there was a sort of mixer where investors and startups got to chat. I remember distinctly that this time we were able to sign some SAFE’s right there, with investors we had just met.
As someone who didn’t have much money at all, the idea that someone would sign a $50,000 agreement with someone they just met blew my mind.
It still does if I am honest.
Now 50k is a fraction of the total that we would eventually raise, but it was awesome to see just how fast it could be done.
You too can raise money, compensate advisors and make your life so much simpler by using the YC safe.
And hopefully this guide has helped you to understand how exactly to do that.
Until next time,
Jamie
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