Understanding SAFEs and Priced Equity Rounds by Kirsty Nathoo

YC Partner Kirsty Nathoo gives the lowdown on several different ways to capitalize your company and how those impact founder equity and cap tables overall.
Transcript and lecture slides here: www.ycombinator.com/library/6...
This lecture is part of YC's Startup School, a free online program and global community of founders. Register and join the community at www.startupschool.org/
Chapters (Powered by bit.ly/chapterme-yc) -
00:00 Introduction
3:53 SAFEs
10:15 Post-money SAFEs
14:35 Dilution
22:40 Priced rounds
27:44 Priced round dilution math
41:07 Top tips
42:48 Don't over-optimize
44:08 Conclusion

[@chapterme]

Chapters (Powered by ChapterMe) - 00:00 - Introduction 03:53 - SAFEs 10:15 - Post-money SAFEs 14:35 - Dilution 22:40 - Priced rounds 27:44 - Priced round dilution math 41:07 - Top tips 42:48 - Don't over-optimize 44:08 - Conclusion

[@sadidrahimi]

I really don’t understand how 1) this is free 2) only has 100k views People try to get rich quick following scams but won’t draw their eyes to real content like YC. YC is doing God’s work 💯

[@ppxppx]

the best explanation on the internet.

[@mmennote]

Thank you for breaking it down in such a simplistic fashion.

[@jamiejswagga]

Great job Kirsty and thank you YC! Keep putting out more of this gold!

[@monika615]

Approachable summary for new founders to understand SAFEs, thank you

[@sikhswim]

Clearest and most coherent explanation of this I’ve ever seen. Thanks Kirsty!

[@JohnOverstreet]

Thank you Kirsty for a great primer on SAFEs.

[@visioneerdesign2081]

Thanks for the presentation. Incredibly informative and helpful.

[@MegaXerk]

Thanks Kirsty, my understanding of SAFEs significantly evolved. I always thought SAFEs always get unlocked at the same valuation as the next round but TIL that there can be a valuation cap introduced.

[@estegy]

Kristy is an amazing instructor ,,, great job

[@Shakti_Singh_Om]

It can't be explained better. thanks Kirsty and YC

[@Emmaxson]

This makes a lot of sense ❤ Thanks Kirsty

[@diegooruna1305]

One of the best videos so far on this topic

[@fungisaurs3717]

Fantastic. Simple and easy to understand! Thank you.

[@jord9356]

Thanks for articulating clearly, she knows her stuff!

[@rudeandconfused]

16:10 That's some nice articulating there.

[@itsmohdiii3689]

@@rudeandconfused LMAO

[@anssiruuhikorpi5061]

This presentation was so good, really help me to understand safe and cap table, etc. Awesome help!

[@johnbcollier]

This video is gold. Thank you!

[@daryaslizh9911]

I really liked the explanation of SAFe, best I found so far

[@isaacm.1461]

Just to echo others, thank you! Great info and great explanations.

[@charliekaru]

Excellent work Kirsty.. Totally explained it super clearly

[@Bigeinla]

Best explanation on SAFEs. Thanks

[@sanjeevanand6585]

Thanks for making life easier. Kirsty Rocks !!!!!!

[@henrikcarmel374]

A perfect presentation - in proper understandable english. She smiles with her eyes😃 The effects - and dilution potential - of the SAFE concept is finally fully understood.

[@rajinderyadav9250]

Kirsty does a fantastic job of explaining how to understand the fund raising process, the fog has lifted. I feel more comfortable about approaching raising capital and need to start thinking about my cap tables.

[@consommableechographiealge8418]

what is the cap in startup and what is the cap table ?

[@andreach5006]

Thank you very much for this video! Really interesting

[@ledgerfunding9000]

GREAT explanations - super helpful!!!

[@harpreetgill8024]

This was incredible. Can we have the excel sheet where this was calculated? Tried mimicking the calculations, got ~305 shares off, so although most of the #s tally, some are off in last few decimals. If the original is available, can reverse engineer to see where I went wrong?

[@delbertwhitejr.1150]

A great presentation on how to capitalize a venture, through the venture's life-cycle, and how to drive your capital financing process. YC continues to pay dividends.

[@yasserghazy5297]

Thanks Kristy.... that was really informative

[@DarshilPatelMusic]

Information is a precious like gold.

[@ozzyfromspace]

What a beautiful explanation 👏🏽❤️✌🏽

[@AlanDeRossett]

good explanation Q: How is a Safe recorded if not a debt and not a share represented in a cap table? ie: for Benefit Corp? Typically a Benefit Corp will have a recital on the Stock certificate issued representing the Articles of Incorporation amendment after 2/3rd of stockholders elect to become a Benefit Corp. This could happen after a safe was issued.

[@swateabeauty8835]

Very well explained!

[@adrianwilk9368]

This is incredible! Thank you!

[@unankacynthia66]

Great explanation. Thank you

[@louisliu6488]

Thanks for sharing. Very helpful.

[@mohdmajid1]

Thank you!

[@dopeinsights]

Great video! Just closed a SAFE after watching this

[@zhandosyembergenov1990]

Loved the content, thanks for sharing on KZbin

[@cahiker07]

This was EXTREMELY valuable. Would take an entire 1-day, hands-on, scenario planning workshop on this subject. Let’s fire up Excel on the laptop and model these types of scenarios so we (investors and startups) can get smarter about how equity ownership plays out over time. Has anybody built an app to model these types of scenarios?

[@thekingstonzone]

Monique Lambert Yes, check out "Carta" scenario modeling. The company used to be called e shares...now called Carta.

[@jmanoochb2]

@@thekingstonzone Yes, that exactly.

[@afrococonut8018]

Extremely great explanation

[@consommableechographiealge8418]

thank you kirsty excellent ptesentation, I explained the math sife however I fidnlt catched legal and financial terms, maybe because I am not familiarized with options and stocks or maybe the problem is my weak english but I can feel how much important your presentation for any founder, who know maybe one day I visit YC and you explain all these things in details face to face😊 All my encouragements

[@AccelerList]

Awesome video!

[@PJandBRO3343]

Great info!

[@daviegaming07]

Wonderful explanation

[@XiaoLongGungFu]

That was great! Thanks!

[@MASTERPPA]

Very simple concept to understand.

[@eduardouribe6426]

Thanks for the information

[@elijahvdp]

Great presentation. One thing that you didn't explain and that i can't figure out is the option pool increase. How did you get to 1.695M?

[@sambyksg2011]

Excellent video!

[@LECityLECLEC]

The last q was good Founder investing: safes or loans to the company? Which is better?

[@genesisdotre]

18:40 question about the dilution, same here!

[@TilekMamutov]

@22:40 Why are series A investors negotiating such a large pool increase as a part of the investment in this example? Isn't it better for a company to increase the option pool only as needed?

[@MLouah-gp9ef]

Does the note automatically convert into a preferred share or an ordinary share ?

[@huhdam8518]

Could someone please share how we are supposed to calculate that 1,695,000 shares for the option pool increase? I think this is an important part of the calculations we as founders need to consider but it is not being explained.

[@mathieumolas484]

Thanks YC

[@xiaopinhaji8701]

Thanks Kirsty

[@dedu15]

Just to make sure I understood: post money the meaning is after raising on priced-shares/Series A?

[@streetcred9585]

love it!

[@Soul4Sail1]

At 22:00 how would you calculate that equity then? You say once equity is given ie; stocks to employees,etc. then you're saying you calculate ie; %85 of the %92.5 remaining? & not from %100 & then how do you treat early investors vs. late in different funding rounds? the original percentage of post-money in that round is locked in & added? it seems in your examples..right?

[@shawntsou660]

Can some one please tell me at min 36:15 how did option pool increase happen? ....

[@lucas182512]

thank you!!!!

[@hemendrakumarvarshney8825]

Good presentation. How much the company is sold should be based on pre-money valuation? This is how the dilution effect on existing shareholders will be known. Isn't it.

[@bccoleman8678]

What if the options pool never got issued out to employees over time. And the directors decide to cut it back? Would it just get prorate get spread across the cap table?

[@calebng9235]

Can I ask for the calculation of the 1.695M shares increase in the option pool?

[@Emmaxson]

My take home - Do what you need to do with the money and make the company a success

[@mertdeveci6905]

Did anyone find the model for the increase in the options pool she talked about?

[@alvinjacobsblydenstein7948]

Kirsty is the best

[@azizmamatov6723]

I think that the lawyers should present this topic as it is heavily skewed towards rights and obligations and the finance stuff is minimal here - simple arithmetic to explain dilution. I'd really want to understand why 8s the structure what are the alternatives and have someone with deep background and practice on fundraising contracts.

[@cooltechchoi9966]

Great Job

[@hoseaderrick]

I am lost on how she got the calculations for the shares, I'm getting different figures. Anyone care to help me clear that up?

[@mdebrahimchowdhury8061]

Good Job!

[@sapphirequestions6080]

thank you sooo much for sharing your knowledge, extremely helpful. PS : Kirsty you are officially my women crush

[@FahadShah822]

This is the important stuff.

[@itsmohdiii3689]

Well Done Kirsty

[@stephanielockett7541]

thanks,

[@afrococonut8018]

Does anyone know how she calcualted the new issues option poll of 10 % to be 1.695 M shares?

[@mirzasaputra7153]

When you'll upload the lecturer slide?

[@Gabebox]

Gotta be accepted to see those ;)

[@SantiagoBasulto]

Just screenshots, but useful to follow: docs.google.com/presentation/d/1iv_T1kU6ECgptgvEiz6qfuW8RG5s_J616vE3LIG5aGI/edit?usp=sharing

[@victora9806]

Hi. I think there is a mistake on shares quantity calculation on min (39:11). new group -> [Options available + Lead investor + Other investor] -> 10%+20%+5%=35% old group -> [Founders + Options Issued + SAFE inv A + SAFE inv B] -> 65% - total issued= 9,250,000+650,000+588,235+1,176,470=11,664,705 Hence new group calculation (post money cap): Options available: (10% / 65%)*11,664,705=1,794,570 (-12 shares in video) Lead investor: (20% / 65%)*11,664,705=3,589,140 (+235 shares in video) Other investors: (5% / 65%)*11,664,705=897,285 (+59 shares in video) Do I missed something?

[@moj741]

I believe you are right

[@yunhuang1841]

welcome to my team!

[@UserName________]

When she refers to “available files with these documents”... “in our website”... what does she mean? In the YC startup founder course program website?

[@adedejijubril8048]

How can I decipher the pre-money valuation?

[@steven871]

What date did YC begin encouraging Post-Money SAFEs? Seems it was some time in 2018? is a pre-money SAFE more beneficial to an investor than a post-money SAFE?

[@Biz519Whiz_M.K.W.]

Just learned what SAFE is while watching Shark Tank March 25, 2022. I definitely don't want to owe anyone be owned by someone else.

[@ivonajavorovic7310]

what will be formula for 1% of the companys total share capital for anti dilution provision on weighted average provision, since this formula is not applicable C2 = C1 x (A + B) / (A + C) in my case

[@jiangyou4475]

its post money SAFE. why does the SAFE holder share get diluted after price round ?

[@VoltHaul]

What happens if one would never have a prices round because the safe money is all it needed to kick off growth on its own?

[@vincenzochianese2143]

Do you guys know what happens to unexercised options in case of an acquisition? Who's the owner of these ones, in case?

[@mohdmajid1]

If there is an vesting acceleration clause, these will be vested immediately . If not,i do not know what would happen

[@vincenzochianese2143]

Vested by who? If they're not exercised, nobody owns it. Or maybe they're given back to the owners?

[@_luka_bagdavadze]

What happens to employ 5% when we go to seed round and sell 10% of the company? Do they still have 5% or their equity gets reduced to 4.5%?

[@rudeandconfused]

16:10 Ayee Ayeua Ayaye

[@RainerArencibia]

In the 40:12 frame, Is the company or founder able to buy back the preferred shares sold to investors when the company is profitable?

[@pzyeon-im8qp]

I believe that's a no. Unless investors want to sell their shares and the agreement lets them. When company is profitable all shareholders get dividend after all expenses are deducted.

[@badrekb5175]

1500 companies .... that's more than a lot. nice presentation

[@3nityC]

After watching still didn't understand is there a software for this?

[@benatiayaniv]

Super!

[@andyjbryant]

"ok so this step you're going to have to trust me on" - re new options created... yeah she wasn't joking. The formula for new options created, after doing the algebra, is NO = -TOP.R(OC+NPs)-Vpre(-OAO + TOP.OC + TOP.NPs) / Vpre(TOP-1)+TOP.R where NO = new options TOP = target option pool OC = old common stock capitalisation NPs = New Preference shares created (for SAFE holders) Vpre = Pre money valuation OAO = Old available options

[@GAMasterMedo]

I'm trying to follow along. What is `R`? Can you put in the sample numbers in the calculation from this video into this equation to make it extra clear?

[@andyjbryant]

@@GAMasterMedo Sorry, R is total amount raised. I have a screenshot of a whiteboard with all my workings but when I posted a link here it was removed..

[@elijahvdp]

Still quite confusing tbh

[@andyjbryant]

@@elijahvdp yeah it is. It’s a bit easier to follow if you could see each step of my workings. TBH I just wanted to validate the ‘just trust me on this’ step from the video and build a model of my own.

[@elijahvdp]

@@andyjbryant I totally get it. I was just about ready to contact Kirsty to figure out the details until I saw your post. Thanks!

[@ethanwei5816]

YC, could you share the link to the model Kirsty shared at 36:10 ?

[@FARIKNE1]

Any success with getting the model, Ethan?

[@tmdesormeaux]

She said to trust her on the 10% increase in options, but how do you go about calculating that? Must we use it as a plug?

[@shawntsou660]

same question...

[@MohamedOrikat]

In the scenario of priced round is less than the Cap, Safe investor should enjoy a discounted valuation.

[@eugenioscafati7328]

Does anyone has a sheets template to model this?