9 ms·

Overall, simplifying how to understand one's cap table is great. It gets in the way of many founders understanding their business in really pernicious ways. I

by mpenn 8y ago

Overall, simplifying how to understand one's cap table is great. It gets in the way of many founders understanding their business in really pernicious ways. I do believe this will change the dynamic for YC founders dramatically 1 - 3 years out if not ready for a Series A (equity round) but need more capital (seed extension). I know many people who raised $500K - $3mm more on SAFEs. Because they were pre-money, the dilution for stacking SAFEs worked. Now, that will be much harder. The next round of financing will need to be an equity round to convert SAFEs to equity. I don't know if this is good or bad, but it will push people very heavily towards an equity round if they need any more funding.

mwseibel 8y ago
It would still be very easy to raise a bridge round on SAFEs at a higher cap (or the same cap). Not sure why there would be a push to equity round. Even better, you'll know your dilution after the bridge round which will better allow you to plan for the A.
- mpenn 8y ago
  My understanding is that additional post-money SAFEs dilute solely common, whereas additional pre-money SAFEs dilute common and other pre-money SAFEs. So if you want to do a new round, by doing an equity round, you can dilute the post-money SAFEs with common. But if you do a 2nd post-money SAFE round, solely common gets diluted. Since keeping cap flat is logistically / emotionally easiest for both sides to swallow, the founder dilution is worse under a "flat" scenario. In the pre-money world, if you did pre-money $10mm cap and raised $2mm, then later another $2mm at same cap, common would own ~71% (10 / 14) on conversion (assuming A is high enough). In post-money world, if you do $12mm cap and raise $2mm (so equivalent to old world in 1st round), then later raise another $2mm with same cap, common would own 67% (8 / 12). That's just 4 - 5%, but a real difference. So I believe the incentive is higher to do an equity round to convert the post-money SAFEs so they can be a part of the dilution of the new round. Unless I am mistunderstanding how they'd convert or something else here. The math is complicated (which I guess is the whole point of why moving to post-money will improve founders' understanding).
jasonkwon 8y ago
In addition to Michael's point, the other thing that we're seeing is that sometimes people will voluntarily push a priced seed round in order to convert existing premoney cap safes -- because they have no idea what the cap table really looks like.
- mpenn 8y ago
  Interesting. Anecdotally, I have seen the opposite, where a company will raise multiple layers of SAFEs since pre-money SAFEs get diluted as you add more SAFEs, and you don't need to negotiate board seats or any control terms with a SAFE round. But obviously you have seen the real data on what co's are doing, not just a few anecdotes!

by mpenn 8y ago

mwseibel 8y ago

It would still be very easy to raise a bridge round on SAFEs at a higher cap (or the same cap). Not sure why there would be a push to equity round. Even better, you'll know your dilution after the bridge round which will better allow you to plan for the A.

mpenn 8y ago
My understanding is that additional post-money SAFEs dilute solely common, whereas additional pre-money SAFEs dilute common and other pre-money SAFEs. So if you want to do a new round, by doing an equity round, you can dilute the post-money SAFEs with common. But if you do a 2nd post-money SAFE round, solely common gets diluted. Since keeping cap flat is logistically / emotionally easiest for both sides to swallow, the founder dilution is worse under a "flat" scenario. In the pre-money world, if you did pre-money $10mm cap and raised $2mm, then later another $2mm at same cap, common would own ~71% (10 / 14) on conversion (assuming A is high enough). In post-money world, if you do $12mm cap and raise $2mm (so equivalent to old world in 1st round), then later raise another $2mm with same cap, common would own 67% (8 / 12). That's just 4 - 5%, but a real difference. So I believe the incentive is higher to do an equity round to convert the post-money SAFEs so they can be a part of the dilution of the new round. Unless I am mistunderstanding how they'd convert or something else here. The math is complicated (which I guess is the whole point of why moving to post-money will improve founders' understanding).

jasonkwon 8y ago

In addition to Michael's point, the other thing that we're seeing is that sometimes people will voluntarily push a priced seed round in order to convert existing premoney cap safes -- because they have no idea what the cap table really looks like.

mpenn 8y ago
Interesting. Anecdotally, I have seen the opposite, where a company will raise multiple layers of SAFEs since pre-money SAFEs get diluted as you add more SAFEs, and you don't need to negotiate board seats or any control terms with a SAFE round. But obviously you have seen the real data on what co's are doing, not just a few anecdotes!