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Answers
Answer:
Explanation:
There are four versions of the new post-money safe, plus an optional side letter.
Safe: Valuation Cap, no Discount
Safe: Discount, no Valuation Cap
Safe: Valuation Cap and Discount
Safe: MFN, no Valuation Cap, no Discount
Pro Rata Side Letter
Safe User Guide
ABOUT THE SAFE
Y Combinator introduced the safe (simple agreement for future equity) in late 2013, and since then, it has been used by almost all YC startups and countless non-YC startups as the main instrument for early-stage fundraising.
Our first safe was a “pre-money” safe, because at the time of its introduction, startups were raising smaller amounts of money in advance of raising a priced round of financing (typically, a Series A Preferred Stock round). The safe was a simple and fast way to get that first money into the company, and the concept was that holders of safes were merely early investors in that future priced round. But early stage fundraising evolved in the years following the introduction of the original safe, and now startups are raising much larger amounts of money as a first “seed” round of financing. While safes are being used for these seed rounds, these rounds are really better considered as wholly separate financings, rather than “bridges” into later priced rounds.
So our updated safes are “post-money” safes. By “post-money,” we mean that safe holder ownership is measured after (post) all the safe money is accounted for - which is its own round now - but still before (pre) the new money in the priced round that converts and dilutes the safes (usually the Series A, but sometimes Series Seed). The post-money safe has what we think is a huge advantage for both founders and investors - the ability to calculate immediately and precisely how much ownership of the company has been sold. It’s critically important for founders to understand how much dilution is caused by each safe they sell, just as it is fair for investors to know how much ownership of the company they have purchased.
Another new feature of the safe relates to a “pro rata” right. The original safe obligated the company to permit safe holders to participate in the round of financing following the round of financing in which the safe converted (for example, if the safe converted in the Series A Preferred Stock financing, a safe holders - now a holder of a sub-series of Series A Preferred Stock - would be allowed to purchase a pro rata portion of the Series B Preferred Stock). However, while this concept was consistent with the original concept of the safe, it made less sense in a world where safes became independent financing rounds. So the “old” pro rata right is removed from the new safe, but we have a new (optional) template side letter that provides the investor with a pro rata right in the Series A Preferred Stock financing, based on the investor’s as-converted safe ownership, which is also now much more transparent. Whether or not a startup and an investor enter into the side letter with a safe will now be a choice that the parties make, and it may depend on a variety of factors. The factors to consider may include (among others) the purchase amount of the safe, and amount of future dilution the pro rata right will cause for the founders - an amount that can be now forecast with much greater accuracy when post-money safes are used.