Good morning, fellow founder! 👋

Welcome to another edition of FounderForge. Your Europe-focused startup digest - just because we do things a little differently here! 🇺🇸 👀

If you missed our last issue, you can still read it at the link below! 👇

Today's topics are all about keeping them in the loop:

• SAFEs vs Priced Rounds 🏷️

• The Impact of Different SAFE Terms 🏛️

📊 Data Dive: SAFEs vs Priced Rounds

With the crazy fees lawyers and notaries charge for priced rounds, it seems tempting to go all the way and just do your early rounds with SAFEs - just to save (on money). 🤑 

The big question is how far can you go before investors want some certainty (and a framework under which their investment works). 📜 

Let's look at some numbers.

Going with a SAFE round for smaller rounds (below the 1M Euro mark) seems to be the default for most founders.

Understandable, as at this stage every Euro spent on lawyers hurts twice - and is often even less important (the company is probably just starting out, is it really the time to discuss the rules of the game before we have any sign of PMF?)

Interestingly, it is not uncommon for also larger rounds up to 3M Euro to be conducted through a SAFE. 🕵️ 

However, the trend is clear: the more money, the more likely a price round is.

How big are these SAFEs?

A "SAFE Round" is a collection of independent SAFEs signed with multiple investors within a similar time frame and on similar terms. 📍 

The question now is how big is a typical SAFE, and the answer is: it depends.

If you're raising less than 1M Euro, more than 50% of your checks will be for less than 50K Euro each.

If you're raising a small "just getting started" round of 250K Euro or less, about a quarter of your checks will be for less than 10K Euro. 🔼 

So - small checks matter! They are often the start of a ripple effect of bigger rounds, as they lead to introductions to bigger angels and bigger VCs.

Now that we understand that SAFEs are the way to go for your first money in, let's take a closer look at how they work and what you should keep an eye on! 👁️‍🗨️ 

🛠 Founder's Toolkit: The Impact of SAFE Terms

You may not believe it, but the investment amount and the valuation are not the only terms that matter in a SAFE. 🤔 

The way certain terms and mechanisms are constructed can significantly affect your ownership, future funding terms, and what happens to your company if things don't go as planned.

The Two Non-Negotiables

There are two things that are simply not negotiable.

If an investor wants you to accept these terms, it's time to run (at least if you have any other options). 🏃 

1. Liquidation Preference

1x Non-participating liquidation preference is fine.

No liquidation preference is better (duh, who wouldn't want that), but most of the time not really an option. 🥹 

What is not acceptable is a PARTICIPATING Liquidation Preference (who invented that bs?) or anything beyond 1x (dear investor, be happy you get your money back if things go to shit - no need to be greedy).

2. Repayment

The goal of a SAFE is to have a simple instrument to invest in a company quickly without going through a lengthy process with lawyers.

When you invest in a company, you receive equity in return and your capital is tied up until a cash event occurs.

Why should SAFEs be any different? 🙃 

So why should there be payback if an investment round does not happen until day X?

This usually means that things are not going as planned.

The last thing you want at that point is an investor asking for their money back.

So let's keep it simple and just say categorically no. 🙅 

The Two Dilution Clauses

There are two main mechanisms that massively affect how much you dilute when the company goes through a priced round:

1. Pre- or Post-Money Valuation (Cap) 🎩 

The difference is simple: one includes invested capital in the valuation and the other does not.

Both are fine, but you need to know the difference - and calculate accordingly (especially if you are doing multiple SAFEs).

2. Pre- or Post-Round Conversion 🔠 

Will the SAFE convert along with the priced round or separately?

The first case means that SAFE investors will dilute like any other shareholder (similar to how they would have invested in a "normal" round before).

The second case means that SAFE investors have practically a built-in anti-dilution clause.

Sounds trivial, but could cost you a few (unexpected) percentage points...

The Standards 💫 

So there are a few rules of thumb that you can use as a guideline to know if your SAFE terms are fair - or not.

• Post-Money Valuation Cap

• 10% - 20% Discount

• 0% - 5% Interest (depends on market rate)

• Last Priced Valuation = Floor Valuation

• 1-2 years Maturity Date

• Conversion at Floor Valuation on Maturity Date

• No Liquidation Preference or 1x Non-Participating Liquidation Preference

• No Redemption

• Pre-Round Conversion (favored by us but not standard)

• SAFE Investors receive the same rights as Priced Round Investors

(We hope we didn't miss anything)

The FounderForge Dilution Calculator

Because calculating what all these different terms mean for your ownership is a nightmare, the FounderForge team took the time to put all these considerations into a neat little GSheet.

You can find it for FREE (as always!) at the link below.

🔗 Founder's Library: Curated Resources

A collection of random reads that the FounderForge team enjoyed.

• Why My Startup Failed by the beehiiv Founder

• 10 Big Mistakes to Avoid as a First by Firstround

• Fisker Lost Track of Millions in Customer Funds by Sean O'Kane

• Biggest Y Combinator Failures by Kyril Kotashev

• ✈️ I Sold My Business (And It Sucked). by Yong-Soo Chung

• How 9 Months of Building Without Success, 2 Difficult Pivots, and Dozens of Rejections Resulted In Loom by Shahed Khan

😂 Meme of the Fortnight

When you find out that POST and PRE money actually makes a difference… 🫥

🤔 Your Thoughts on Today's Edition

• 🔥 It was great!

• 😒 Meh - it was okay.

• 👎 Not interesting to me.

That's all for now!

If you find this newsletter valuable, share it with a friend!

Cheers,
The Founders Blacksmith 👋

Issue #16 | 18. April 2024