Thread by @ChrisHarveyEsq

Law of VC Episode #18 - Simplifying the Safe

• Remove Valuation Caps & Discounts

• Replace with Conversion Percentage

Instead of teaching founders the nuances of discounts, valuation caps and MFNs, why not simplify the Safe and treat it like a cap table with fixed ownership?

2/ After five years of testing pre-money Safes, YC made two major changes to the Original Safe:

1) Pro rata rights removed by default
2) Valuation Cap is now "Post-Money"

What does that mean?

Here's a chart explaining the differences and how to count the other pre-money stuff.

3/ To see the differences between pre-money and post-money Safes we need to do a little math.

Key Assumptions:

• $100K pre-money Note
• $100K Post-Money Safe
• 20% option plan expansion.

This is a cap table showing very little difference (0.78%).

docs.google.com/spreadsheets/d…

4/ Now let's see what happens when the startup starts to raise more money & reduces its option plan.

Key Assumptions:

• $500K pre-money Note
• $500K Post-Money Safe
• 10% option plan expansion.

Whoa, that's a whooping difference! (9.15%).

docs.google.com/spreadsheets/d…

5/ Charlie O'Donnell (@ceonyc) asks why don't we get rid of discounts?

I would take it further: Why don't we get rid of discounts & valuation caps?

Keep it REAL simple with a conversion percentage.

There's no hiding what's happening to your cap table.

https://twitter.com/ChrisHarveyEsq/status/1365741868961591298?s=20

6/ Paraphrasing Sam Altman's Axiom:

"There's only 100 points on a cap table"

This makes startups more aware of raising a bunch of money on Post-Money Safes without fully understanding the consequences of their actions.

More information below.

/Fin

lawofvc.substack.com/p/18-episode-s…