Background reading: Why Startups Shouldn’t Use Post-Money SAFEs
As we’ve written previously, the Post-Money SAFE template published by Y Combinator has dramatically worse economics for founders and common stockholders than it should, but it has been getting lots of promotion from the investor community because of how favorable it is to them.
To help, we’ve published a very easy-to-understand redline of the Post-Money SAFE that “fixes” the most impactful economics problem in the Post-Money SAFE: the fact that any subsequently issued SAFEs or convertible notes dilute only the common stock and not investors. Many, many founders are getting tricked/duped into signing these documents without fully understanding how that grossly investor-favorable anti-dilution mechanism hurts their cap table.
The only substantive modification in this redline, in track changes (so the edit is transparent), is the clarification that the Post-Money Cap’s denominator includes convertible securities only as of the closing of this particular SAFE financing. Any subsequently issued convertibles dilute everyone on the cap table, as they should. As a result, investors can be confident that they are getting about X% of the cap table as of today, which was the stated logic of post-money SAFEs to begin with, but there is alignment between common and investors as it relates to post-closing dilution.
Working with a lawyer you could tweak the language further, such as providing that “up round” convertibles (higher valuation caps) dilute everyone, but down-round (lower valuation cap) convertibles don’t dilute the investors. See: “No Code” v. “Open Source” Startup Law for a better understanding of why templates are good, but they shouldn’t necessarily mean founders shouldn’t negotiate with them to get fairer terms.
Download here: “Safe for Founders” Post-Money SAFE redline.
Also, a firm colleague created a very helpful Google Sheets model breaking down the math/economic implications of the pre-money, YC post-money, or proposed redlined post-money structures. Short story: in most cases, millions of dollars are at stake for the founders depending on which structure they use.
Requisite Disclaimer: This is merely a suggested redline for founders to use with counsel, and not in any way a suggestion that this redline is a “standard” SAFE. We take no responsibility for your use of this redline.