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So, good morning, good afternoon, and good evening, everybody. My name is Sam Wong, and this is a session on Founder's Guide to Safe Startup Fundraising. I've done the session maybe about 10 or 11 times starting in 2021. However, this is an update for a lot of 2025-2026 content. There's a lot new content in this version of the presentation. So hopefully, buckle up. It's going to be a lot of stuff to cover. Fundamentally, one of the things we do tell founders is don't blindly sign a safe. If you're fundraising, there are a lot of nuances about a safe that can really be a surprise. And then what we're trying to do here in this session is help you to be able to understand the nuances so that you can make informed decisions about how you want to fundraise for your startup. OK, so it's confusing. and if you look back at the history there's actually multiple versions of the safe and most people don't even know that okay the original version was released by y accommodated in 2013 um that was not a they didn't assign a version number to that and then over time they started releasing version 1.0 1.1 1.2 and there's also a version that was released in 2013 even a quiet release version 1 dot 3 that most people are not even aware of okay so there's actually been five different revisions of the safe templates from Y Combinator. What we're trying to do with this session here is really emphasize what we believe to be one of the most important things that founders need to do, and that's to learn. We always talk about founders needing to be able to emphasize and invest in their learning because startups are hard and most of the concepts are very, very difficult to be able master. So the more that you can invest in learning, the more that you'll execute well. The challenge is that in my experience, most startup training is too basic. It's pretty fundamental. It is pretty simplistic type of content. Startup concepts, as I mentioned earlier, they are hard. How do you deal with some of these challenges if they are indeed hard? What we try to do with our offerings at my company is rapid expert learning. And if you've been to either of my sessions, you know I'm a movie fan. One of my favorite movies is The Matrix. And if You Have Seen the Movie, there's a scene where the main character, Neo, is able to learn martial arts instantaneously through the technology that they have. And he just wakes up a moment and says, I know Kung Fu. It's just a great scene to me because I wish I knew Kung Fu, but anyway, my name is Sam and I run a company called Fundable Startups. way of background. I've done five startups. The first two of them shut down. Thankfully, startups number three, four, and five were all acquired. I also was an advisor for two other companies that got acquired as well. I do a lot of speaking. I spoke at TechCrunch Disrupt twice. I've spoken at the Lean Startup Conference, been quoted in magazines. I'm also a volunteer and spend a lot of time with some startup accelerators. Okay. In my company, Fundwell Startups, we offer self-paced training. We also have a live training academy. So it's some of the same content, but delivered in a live format. We do one-on-one coaching. And I also help with fundraisers that usually involves building pitch decks and helping with investor outreach. Okay? It's a do-it-yourself, done-with-you-or-done-for-you type of situation. I also spend a lot of time playing a number of different roles, okay? I don't only do content. I don'T only do training. In fact, I probably only spend 20% of my time or less on some of the content and training. So I work as an instructor and a coach. I ALSO wrote a book on startup execution, and most of my TIME is spent being a fractional founder. I typically play chief business officer, Chief Financial Officer, and sometimes play a CTO or CPO role. I'm actually a software engineer back in developer by training, okay? And the rest of my time is spent as an investor with Band of Angels, okay. So today's agenda, all right. We are going to talk real quick about funding strategy because it's important to be able to have a little bit of context on where the SAFE comes into play. We're also going to talked about SAFE history, the rationale behind SAFEs and the current trends in the industry. We're going to differentiate between pre-money and post-mONEY SAFES. Most people don't know the difference. And then we're going touch on basic SAFE conversion math. A SAFE, if you've been trying to raise funds, hopefully you understand that a SAFE is a contract to get equity at some point in the future. Then we'll touch on SAFes and how they affect startup cap tables, talk about briefly cap table management options with a focus on Carta. I am a Carta partner as well. Then we'll touch bases on some safe variants. There's a lot of other content that we don't have time for. This full course is about two and a half hours long. Okay. And then we'll end with a summary to talk about some resources and a special offer. So we do encourage you to stay towards the end to be able to see, to get the offer. As I mentioned, we're only going to cover probably about 30% of the class, we just don't have time to cover the entire content because it's just too much detail. And I do apologize in advance. If you've been to some of my training, you know that I cover a lot of detail. This class is one of the most difficult to keep up with. Okay. So if you're dual tracking and trying to multitask, that may be hard to absorb everything. I'll do everything I can to explain things clearly. But if you need some follow-up sessions, some follow-up conversations i'll try to make myself available for some coaching sessions if you need okay we do talk about a lot of detail in this session because your startup i use this analogy from time to time your startup is kind of like this truck and if you're going down the road the details can be a small pile of nails the if you hit that pile of nail your best hope is you just get a flat tire the worst situation is that truck will crash and if that truck is if that crashes bad enough, that truck will no longer be drivable. Your startup will probably die, okay? That can happen, and it has happened multiple times, which is one of the reasons why I wrote the book on startup execution, because in my view, execution wins the day, okay. Disclaimer, unfortunately, I do have to cover this. We are going to cover a lot of content, but none of this content should be construed as legal, tax, or financial advice. You need to contact a qualified professional who understands your situation. There's a lot of information and a lot educational content here. So we're going to start by talking about funding strategy. And this is just a quick high-level overview. We generally encourage that anytime you're doing anything important, strategic planning really delivers better outcomes. So most people take a random, hey, I'll just work on the most urgent or the most important thing today. And that usually results in, you know, missing the mark. A strategic process, anything important should be planned out because that increases the chance that you'll actually hit your target. Okay. So that also applies to fundraising. We do encourage people to build out a fundraising strategy. Well, what is it? Okay. Well, we define a funding increasing strategy. We break it down into four different components. The approach, which answers three questions. When should you raise? Why should you raise your funds this way? And how much should you rise? The second component is sources. From where? What pool of funds or what pool of investors should you, what pool funders should you raise funds from, vehicles, or what type of contracts should you use, and then finally targets. Once you've determined who your funding sources may be, exactly which investor or investors would you target? This session is going to dive deep into the funding vehicles, specifically the SAFE, Simple Agreement for Future Equity, which is a contract offered by Y Combinator. We do cover a lot of detail because we've seen lots of founders make common and costly fundraising mistakes. One is not raising enough money. Of course, if you run out of money, then you will have to raise money in distress. And anybody who's raised money before in the past knows that when you're in a crunch, that's the worst time to be able to raise money because you're going to get taken advantage of. It's also a problem if you raise too much money too early, you may wonder, how could that be a problem? Isn't that a good thing? It can be a good things in that you have a longer runway. But what that means if you raise too much money too earlier is that you raise money at a lower valuation, which means you're going to over dilute yourself. Between not raising enough money and raising too much money, I suppose you prefer to raise too money. But that does have a backside bite, which is over dilution for the founders and the employees you can also raise money with poor terms most people never consider the terms because they don't understand it okay many seasoned investors actually advise it may be better to raise money at a lower valuation and get better founder friendly terms okay it's it can be a very very important deal and if you are not very fundable and don't build a fundraising strategy well, you might raise money from the wrong investors. Long-term stock exchange, LTSE, had done a survey on how many founders regret taking money from one of their investors. And 28%, I think, 29%, somewhere around there, said yes, they raised money from somebody that they wish they never had taken the money from. These four mistakes result in several painful outcomes. One is a smaller upside. Your startup proceeds will probably be smaller. You may lose control of your startup faster. And operationally, you're going to run into all sorts of challenges and problems. These outcomes usually are not visible for one to five years somewhere in the future. So in terms of the fundraising approach, the anchor of the fundraising strategy is when should you raise funds? This slide shows the company's valuation growth over time. It is not a smooth curve. It's a stair step, and that stair step is anchored by inflection points. An inflection point is a measurable milestone that dramatically increases your value. The inflection parts here would be the red diamonds on the chart, and you should raise money right after you hit an inflection point, okay? I don't have time to get into the details about how to be able to do this and what types of inflection points to be able to target, but I only have time to cover the actual outcome. So if you raise funds strategically, the right amount at the right time from the right parties, how is that going to potentially play out? So if We have a fictitious company with a specific growth path, okay, and this particular company studies and understands what their inflection points are. They go ahead and raise the right amount at the right time, and by doing so, they get great terms. Let's assume, for the sake of illustration, this company gets an early acquisition offer for $40 million, and they accept it, okay? So that's great. contrast that with a company that does not build a funding strategy so they raise too much money in their first round in a convertible note that convertible node does not get them to the second inflection point which means they have to raise a bridge round to be able to you know cover the expenses until they can actually raise the the next round the the seed round ended up being more than they actually needed. So they over diluted themselves. This company has the exact same growth path, but the fundraising is all messed up. And if that company gets the exact same $40 million acquisition offer, they will actually walk away with a lot less money. Well, how much less? On the love side, raising funds strategically with the funding strategy, in this scenario, the employees and founders keep $31 million of the $40 million acquisition. But on the right side, without the funding strategy, and you can break down all the math if you are a glutton for punishment, the employees only keep $8.8 million. Most of the funds in a $40 million acquisition goes to the investors. So that is a difference in payout of 3.5x. It can be very, very material. The detail about a funding strategy is covered in my funding strategy class. What I've covered here and given to you is about 2% of the funding strategy class, and if you are interested, this is a little bit more detailed. I'll paste it into the chat window, the details about, sorry, let me go ahead. This is where you can find some detail about the funding strategy class itself okay so let's move on because we've got a lot more information to cover still all right okay so Let's talk about safes history rationale trends all right well let's make sure that we understand what a safe is and how we got here okay so most startup investors well and a company has two types of equity common stock and preferred stock Common stock is held by founders. It is not held by investors. It's very uncommon. It is pretty rare to use common stock as a fundraising instrument because investors want preferred stock. It gives them additional rights and privileges. Well, traditionally, many businesses, small businesses, raise funds through a loan. Either you borrow money from a friend, from family or if you're far enough along, maybe a bank. The loan has a loan amount and an interest rate and a maturity date. The challenge is in a startup environment, very few investors and almost no banks will lend money to a startup because the risk is just so high that the investor will probably not get their money back. So loans are not very common. And if most investors want preferred stock because that's where the big upside is how do you fix this problem well the concept of converting a loan into stock was created in the form of a um a a conversion feature okay and this is the definition of a convertible note okay so whatever the balance you get a convertable note uh today two years from now um there's a triggering event that converts it into stock, the value of the loan balance of the principal plus any interest accrued gets treated as if it was a purchase of the stock at that point in the future. Okay, so there may be a discount that gives slightly more favorable terms and other things like a valuation cap to improve the math on how much equity that the lender or the holder of the convertible note would get because they took an early risk on the startup. And that's reasonably common. Convertible notes happened very often in the early 2000s in startup fundraising. Well, there's a problem with convertible notes. And what if the startup can't pay back a loan because it starts off as a loan? And if there's nothing that converts the loan into stock, then what happens is that the lender can foreclose on the note. And that means they can sell assets of your startup in order to raise funds to recoup the balance of whatever is owed. They have undue leverage on the startup and the founders. So to solve that problem, the concept was, well, let's just not make it a loan anymore. Andthat's how a safe was created. a SAFE is a contractual agreement to take an investment amount. There's just no obligation to pay it back. There is no interest. But a SAIF also converts into preferred stock at some point in the future, just like a convertible note. So convertible notes, SAIFs, and preferred stock are the most common ways to be able to raise funds today. So if you compare a convertable note against a SAife, convertible notice a little bit more of an old school instrument and SAIF is generally viewed as a modern startup fundraising vehicle. The convertible note, when they do get signed, they tend to be larger dollar amounts, where the median safe amount is around $20,000 to $25,000. It used to be a bit smaller, $15,000 or so was the median, but safes are starting to be used for much larger transactions. Convertible notes, the funding is usually done with a smaller number notes you usually don't have dozens and dozens of convertible notes signed but in the safe space you might have you know 20 25 safes signed that is not unusual okay convertible nodes are typically used for early stage startups but they can also be used for mature startups safes are less common as startups start to mature okay and then convertible modes also have that auto conversion have an auto conversion feature whereas safes there is no auto conversion feature all right okay here excuse me um so i do want to uh um mention peter walker peter is a senior director over at carta and he has the reputation as carta's data storyteller carter is a cap table management platform and i encourage you to follow peter on linkedin he has lots of fantastic posts including this one here where he delivers some stats from their analytics because they manage so many startup cap tables now in this specific post he cites how safes and convertible notes have the safe and and convertible note usage has gone up 3.8x in about four years time okay so that is very very much where most startup fundraising especially smaller deals smaller raise amounts are trending towards say some convertible notes well there's another stat from carta where if you dig into the details, it's really almost all safes. 93% of pre-seed fundraising through convertible instruments was on safes and only 7% was on convertible notes. So you can see very, very clearly where the trend is going. Okay. But if this is where all the startups are going and doing a lot of safes, et cetera. What does it lead to when the company is finally doing a seed round? Okay. Well, if you do, again, Carta-based data, 80% of seed rounds are still done on convertible instruments. Okay. 20% are done on a priced round with preferred equity. Okay, so the median amount raised was about two million roughly okay as of the seed round but there's this is where the metric came from the 20 to 26 notes and safes so far and that's a lot of convertible instruments and contracts to sign okay but peter also has another post where he basically states too many convertibles can completely wreck the next round's math, okay? Sadly, most people have no idea what this means, okay, Peter says this is such a big deal, his comment is, give me a good standard priced equity round any day. Later in the session, I'll talk a little bit about some options on how to be able to implement Peter's advice here. So I've been talking a lot, but I would love to be able to get some feedback from some folks. How much dilution do you think comes from a safe round? So feel free to drop in your thoughts, your guess. What percentage of dilution of the startup's equity will get diluted when you raise a round of a bunch of safes? Okay. I'd love to see your thoughts. Don't be shy. I haven't seen anybody make any guesses just yet. Okay. All right. 15 to 20%. That's not a bad guess. 10 to 20%, 20%. Okay. Um, 8%, et cetera. Um. You're not that far off. Okay. So the answer is it really depends on the size of the safe round, which I guess is kind of obvious. So smaller rounds are at the top of this chart and larger rounds are at the bottom. I typically, you know, see safe rounds more towards the middle of this chart. So if you're raising between 500,000 and a million dollars, uh, Carter says the median, um, dilution amount is 13.6%. Okay. But because safe rounds are getting larger and larger, um, the next tier up 1 million to 2.5 million raise the dilution jumps to 19.4% for the, for the median. All right. But that's kind of the mean midpoint, whatever, uh, median. Um, but if you look at the 75th percentile, there are startups that suffered 28 to 31% dilution. So the range can be pretty small. It can be as low as single digits. It Can get as high as 30%. That's a huge variance. And sadly, most founders have no idea how much dilution comes when they sign safes. They're just so happy to get people to raise funds that they go ahead and sign them anyway, without any detail about how much they're going to get diluted. And we'll get into that a little bit more in a couple of slides here. Okay. So pre-money versus post-mONEY safes. This is where it's going to get a littlebit complicated in a moment. But before getting into the difference between a pre-MONEY and a post-Money safe, we need to offer up a definition. Valuation. Okay? Valuations of funding. Fundraising is fundamentally selling part of your business. You're selling your company's stock, okay? So whether you sell 10, 15, 20%, whatever percentage, you're selling part OF your business, so what does that mean? Let's use an illustration. Let's assume you have a very small business, you are a delivery company, and right now you have three delivery vans, okay, you want to grow and expand, but you don't have the funds right now to just buy your own van, so you solicit an investor, that investor says, okay, fine, here's some cash. We're going to help you buy another van. And then you have four delivery vans. So your business is a little bit bigger, able to scale more. On the left side, the state of the business before the investment comes in, the left side, that's your pre-money valuation. The amount invested, you've added to the pre- valuation that equals your post money valuation not too hard okay so conceptually if you're a startup maybe your business you negotiate a pre-money valuation with the investor and you agree upon six million dollars if the investor puts in two million dollars your post-mONEY valuation is eight million okay so that's pretty straightforward on the definition of pre-MONEY valuation and post money valuation. Unfortunately, most people get confused with the term pre and post money. There is a post money safe. Unfortunately the post money save has no correlation with post money evaluation. People get them confused thinking that the same thing. They're not. The post-money safe refers to a conversion method, the algorithm used to calculate how many shares the investor will have once the contract, the safe contract, is converted into equity. The post money valuation defines the company's worth. So conversion method is not company valuation is not company worth. Post-money safe, post-mONEY valuation, no correlation whatsoever. Okay. So how did these terms come to be? So if you look back at history, at the use of convertible instruments, a convertible note was first used in the mid-1800s, believe it or not. It's actually not new. Okay. And Y Combinator created the safe and released it in December of 2013. After about three and a half years of usage, people started noticing certain problems, okay? And those problems were documented in a TechCrunch article released in July of 2017. So because of some of the problems, which I'll get into in a moment, because of some of problems, Y Combinator said, yep, this is a problem. And they went ahead and created a new safe which they called version 1.0 okay clearly these people um whoever created these templates and named them were not software developers um they didn't do a version number on the original safe the red safe there right in the middle uh i guess that can be viewed as version 0.9 or whatever but they version 1 dot o is what they call the new safe when it's not really version 1.0 it's substantively different okay instead of generically calling it safe version 1 safe version 0.9 whatever that new newly created variant of the safe ended up being called a post money safe okay for various mathematical reasons okay which means the previous version becomes a pre-money safe so um again december 2013 that was when the first safe was released. Then version 1.0 was done in September 2018. If you remember from the slide all the way at the beginning, then there's other incremental changes. Version 1.1 was released in 2021 and 1.2 was released in 2023. Okay. But hopefully that helps illustrate the naming confusion here. Okay, let me dig into the article a little bit. Why safe notes are not Safe for Entrepreneurs. Not my article. This was written by a VC with one of the TechCrunch staff. And a little side note here. The title, Safe Notes. That's the wrong name for a safe. Do not call it a safe note. Why? Why is it a big deal? There are actually tax implications to this. If you are an advanced and sophisticated investor and a good tax planner, what you call the contract is important. Most investors want QSBS treatment, and one of the tests for whether or not you would qualify for QSPS treatment will be the name of the contract. A note is a loan. The average person, probably 80% of people out there, refer to safes as safe notes. Notes are loans. Safes are not loans. what you call it will affect and will have a small effect on your tax treatment of the safe. OK, so little sidebar there. All right. In the article from the author, Pascal Levinson, he writes safes have a nasty bite, much more dilution than the issuers thought. okay so how does that play out it's very nasty math okay and for the sake of simplicity i won't go into the the gory details um but let me at least illustrate the concept so dilution in general is normal in a startup when they raise funds but dilution is a zero-sum game that means um the the amount of equity is always 100%. So if a new investor gets issued more stock, that means one or more existing shareholders will get diluted. So if someone goes up, someone else has to come down in their percentage of ownership. All right. How does dilution work with the original pre-money safe. So before the startup raises any funds, you have employees, they own all of the equity in the startup. Then a safe investor comes in and they sign a contract and it says, yes, here's my money and I'll sign a pre-money safe. That results in pending dilution for the employees. Notice it's pending dilusion because the safe is not equity today, it's equity tomorrow. OK, safe investor number two comes in and they sign another safe that results in pending dilution of the employees and any previous safe holder with who signed the earlier safe. Then safe investor. Number three comes in. They sign a safe and it results in pending dilution. of employees and all previous investors. And then finally, a new equity investor comes in. Someone buys preferred stock that triggers the conversion of the safe into preferred stock, and that results in actual dilution now. So how much dilution? Safe investor three conceptually gets diluted one time. Safe investor two gets diluded twice. Safe investor number one gets dilluded three times, and employees get diluted four times. conceptually all new investors dilute existing stakeholders okay it's a little bit more complicated than this but conceptually this is what's going on okay then uh with a post money safe how does dilution work well when before any money comes in as uh similar to the pre-money safe the employees own all the equity in the company the first time the safe investors uh signs the safe, it results in pending dilution of the employees. No different. Second safe investor comes in, it result in pending delusion of just the employees, okay? Third safe investor, pending dilution, of again, just the employee. Then the final preferred equity investor comes in. It results in actual dilution because it triggers the conversion of the three safes. It results in actual dilution of everybody which includes which basically means the safe investors one two and three get diluted one time and the employees get it diluted four times the difference in the amount who gets diluted again when the new investors come in somebody goes up somebody has to come down because only the employees are getting diluted with a post money safe that's why employees get extra dilution, okay? New investors with a post-money safe will primarily dilute the employees. This is actually a significant issue. If you love to read legal details, Jose Anser is a partner with Optimal Counsel. Jose writes an excellent legal blog in the startup space, and where he says, under YC's new safe, the common stock absorbs all dilution from any subsequent safe or convertible note rounds until an equity round while safeholders are fully protected from that dilution. He says, that's crazy. Okay. Unfortunately, this dilution, once again, is not visible until much later when the conversion happens. And if you have a junior attorney who never actually spells out all the details, they just give you, here's your conversion math. You might never know that you got extra dilution. You just know that that was the dilution that you got. Okay. If you have a good startup advisor, somebody who understands the mechanics here, they'll actually model out the details of what the conversion will look like. So you can make informed decisions before you sign a contract instead of like, oh, okay, I guess we signed it. We just have to live with it now. Okay, all right. so another quote from another person who's pretty prominent in the startup industry Gordon Doherty president of the Capital Factory which is an accelerator down in Austin he writes a book called Startup Success and Gordon's quote is I'd say after the 2018 safe templates provided by YC the post money safe I would push hard on the startup and advise them to switch from a post money safe to a convertible note okay that's his perspective all right I don't completely agree with that because this quote was probably several years old and it may be a little bit dated because it's a little hard if the trend is so far down the road towards safes trying to push back towards a convertible note may be difficult okay and in fact since gordon made that quote okay the number of other funding options have come up including a series first and a series safe series safe is different than a safe. Unfortunately, they named it something with a very, very similar name, okay? But they are different, and they are priced equity rounds with very low lift, okay? Very little effort compared to a traditional priced equity round, all right? Okay, so we have the extra dilution from a post-money safe, and then you have the pre-moneys safe. Well, what's the split between post-money safes versus pre-moneysafe usage this chart here shows that the vast majority of safes that are being signed today are post- money safes only 12 percent of safs are pre- money in the conversion math all right in fact that's not surprising because if you go to the the Y Combinator website to try to download the safe. And you notice in the URL, the download only provides the post money version now. Y Comminator has retired the pre money version of the safe, okay? All right. I apologize. I haven't covered a whole lot of questions because there's a lot of content. I'll try to catch questions at the end, okay. All right, so um safe conversion to stock this is a basic conceptual overview because the this is actually a fairly advanced topic okay um if you want the advanced version that i encourage you to read the safe user guide it's a 32 page document and 12 of those pages explains the process the algorithm and examples of how SAFEs convert. It's not simple, okay? But let me at least illustrate it for you visually, conceptually, okay. If a SAFE converts into shares for the investor, how many shares does the investor get? All right, well, the formula works, the high-level formula is pretty simple. You take the amount of money that the SAFE investor invested and you divide by the price per share, okay, the safe price per share. Conceptually, founders want that safe price per share to be as high as possible because it results in the investor getting fewer shares, and investors want a low price per share so they can get more shares. All right, well, what determines the price per chair? That is determined by the dividing the valuation of the conversion by the company capitalization. Now it's getting a little complicated here. The safe conversion valuation is the lower of either the valuation cap or the priced round valuation less any discount. Okay, so the lower of the two. Right now, the most common is gonna be the safe valuation cap, okay? Then you have something a little weird where what is this company capitalization total number of shares obligated what is that okay and remember um the higher valuation on the numerator here it helps founders the higher capitalization on the denominator will help investors all right so what isthis company capitalisation okay so if we take that little formula there that company capitalised remember higher numbers a higher company capitalization number is better for investors. What is that? Well, it depends. It depends on whether you use a pre-money safe or a post-mONEY safe, because what you do is you count up number of shares or options that will eventually factor into that company capitalisation. So both the pre-MONEY and post-Money safe includes the outstanding shares of capital stock and outstanding options no difference okay that's fine of course there's also promised options a lot of companies uh drag their feet and actually issuing the options maybe you hire somebody and they're uh they're granted options but you never went through the board process to actually get them granted that's a problem you should grant it very quickly um uh there's tax reasons and there's all sorts of cleanup issues and stuff but it happens often where people don't actually grant the promise options right away. There's also the unused option pool. All of this is included in the counting up the company capitalization. Where it starts to differ is down here at the bottom. Pre-money safe includes the option pool increase with a price round. So many investors will ask that after the investment is done, that the stock option pool be topped off to 10%, 12%. 10% is probably the most common number, okay? But because every startup issues a different number of options and there's no clarity on, you know, there's, there's low consistency on how many options are going to be issued. If the option pool has been depleted down to 4%, then when you top it off, you have to top it up to, depending on your dilution, top it out to 12%. And then after the preferred stock is issued, then it gets diluted back down to 10%. 10%. Okay, so you actually top off above the end target, because after the round closes, it gets a little bit of dilution, and then it settles at the 10% post-funding target. That option pool increase is included in the math for the pre-money safe, but it is excluded on the post-moneysafe. That actually simplifies the math, because this is an unknown variable, and I think Y Combinator wanted to simplify the math by excluding something unknown. Makes sense, okay? But they also made another change. The SAFE's convertible notes and other similar instruments are excluded from the pre-money math, but it's included in the post-mining math. And remember how I talked about the amount of funds that the post money SAFE dilutes the existing investors. It's this bottom row of the table that actually is how that materializes in real life, okay? That bottom row results in a very challenging situation for most startup founders because that number can be quite material, okay, so safes, cap tables, okay. Hopefully, everybody here understands a cap table, but in case there's somebody who doesn't, A cap table is the authoritative ledger that shows the exact ownership of all company shareholders. It should include preferred stock, common stock, stock options, convertible securities, like a convertible note and a safe, as well as warrants. It needs to be accurate, but it can be very, very complex. It needsと be clear so that people can look at it and quickly figure out what's going on. It should be complete, capturing all shareholders, and it needs lots of detail. There's a lot of data fields that need to be captured to have the cap table be correct. It also should cover and calculate fully diluted ownership, which is what the equity position, what the ownership stake percentage stake would be if all possible agreements converted into stock. OK, so that's the cap cable. Why is it important? Well, most cap tables are wrong. that's the quote from henry ward ceo of carta let me give you an example a while back bloomberg reported a company a software company called tibco was acquired in a fairly significant 4.2 billion dollar buyout but there was a cap table mistake okay it's a hundred million dollar mistake resulting in a lawsuit yes um the 4. 2 billion dollar acquisition i guess turned into a 4.1 billion dollar acquisition okay and if you get an acquisition that big well what's a hundred million dollars i don't know about you but a hundred million dollars is still material to me all right so the challenge is most startups use a spreadsheet to do a cap table and they just say name number shares percent ownership and that's it they think they're done that couldn't be further than the truth because every single line on such a spreadsheet needs to be backed up by the actual legal documents. And in the legal documents, it captures lots of little data points. All those little bullet points in that little graphic on the right, those are relevant to calculating ownership. And every time you issue stock, you have another one of these situations where you might have a stack of legal documents, all with different data points about, you know, vesting start date, termination, reason, blah, blah. All this other stuff. So it's a lot of documents, a lot data. And people who track it only in a spreadsheet usually don't capture everything that's needed, which is why there's been a problem with cap table debt. And it's very similar to technical debt. If you're a software engineer, you might know that technical debt is basically making a shortcut because you're in a hurry and you allow certain problems to exist in the code because it's just faster. That generally results in technical debt, which you know as a good CTO, you're going to have to clean that up at some point. Well, cap tables have the exact same analogy where you have startup equity and you take shortcuts and you don't keep everything up to date. That also results in cap table debt. types of cap table debt or things that cause the cap table debt things that I've seen over and over again I've got 13 different individual problems here which a lot of the times I take fraction rolls I'm cleaning up these 13 problems okay and it's not easy it's not like one of these bullets can be cleaned up in you know an hour sometimes it takes weeks for one of those bullets to be cleaned up so I encourage people dump the spreadsheet use a cap table product uh cap table management software okay um if you've been to some of my other sessions you know that i have a cap table tool it's a spreadsheet and it goes against what i just said okay why well uh i do believe that cap table software should be the system of record all right um and uh unfortunately uh if you are a user of carta their reporting is hard to read if you uh do an export and this is an actual screenshot of an export of the convertibles ledger it's a very wide spreadsheet it um doesn't tell you the type of safe pre-money versus post-mONEY it doesn't actually uh list the valcap oh yeah it's actually there you just have to scroll to the right but that's one of the most important things you want to look at so you might not see it right away and It's also missing some key terms, like does the investor have MFN or pro rata rights, which can affect what a new investor might decide, because those little key bullet points can affect my investment if I'm a new incoming investor. Even the detailed cap table export from Carta, there is no vesting data, and it's not clear how much of the detailed gap table is affected by the convertibles. Where is the fully diluted shares? It's just hard to read. And then, of course, it doesn't capture warrants. The Carta exports desperately need a UI UX redesign, which is why I have my own cap table spreadsheet, which, uh, is really about readability. I use this all the time when I am playing a fractional role or when I'm an investor, I will ask the founders, Hey, can you just take 30 minutes and put your cap table into this format? Because I can see everything at a glance. It's a nice dashboard for most investors. It captures common and preferred stock, RSAs, ISOs, NSOs, warrants, RSUs, all the different variants. It also estimates the fully diluted stake. It has up-to-date investing, which is one of the most important things that I look at when I look into investing in a company. It breaks down the details of the option pool. It aggregates the stake of the stakeholders in case a certain founder or employee has had multiple grants. You want to be able to see what they hold in aggregate. Then it calculates outstanding and fully dilute shares. and it also takes into account an estimate of what the fully diluted stake will be if the convertibles convert, okay? This is very important, but it's very rarely found. This cap table tool is included with my due diligence class, okay, it's the due diligence. Class has 22 different tools. If you're interested, I will go ahead and post the details about the due diligence class in the chat window um i use these tools over and over and over again when i'm doing a fundraise or when i'M an investor asking uh founders to be able to uh provide the content for me to evaluate okay um carta there's been a couple of chat uh messages already about how carter's got some tools here to help and there is a safe automation tool you can actually uh issue safes directly out of carter which is kind of nice, and they also have a safe calculator. A safe automation tool basically asks you a bunch of details about what type of safe you're trying to issue, and it'll actually use the YConda template or their own template, depending on what you choose, to be able to send the safe to the investor. There's a safe calculator. It can be used as a standalone tool, but it's better if you actually have your cap table up in Carta. It's a lot easier to be to capture that. The safe calculator does some scenario modeling as well. Okay. So lots of content here. Why does this matter? I use the Cicada safe calculator to build a situation where a startup has 12 safes. Okay? So remember, the average startup reaching the series seed round has 22 to 26 safes. So 12 is roughly about half of what the average has. And if all the safes are pre-money safes, then in this scenario, after the safES convert and after the fund, the round is raised, the founders keep 53.7% of the equity. Whereas with a post-moneysafe, the safe that gives founders more dilution, the same situation, the only thing that different, that differs is pre-money versus post-moneysafe. In the situation on the right, founders keep 52.08%, which is a difference of 1.62%. So founders received 1.6, or employees received 1,62% extra dilution. Well, how much is that in real dollars? So today and tomorrow. So if you run the calculation, I did it in a spreadsheet. Okay. Today, after you run, assuming you have a series seed, 1.62% is about $200,000 variance in this, given the terms of this fundraise here. Okay, but that's today. What about tomorrow? You're going to raise more funds in a series A, series B, series C. Okay, so the series seed $200000 is the impact of the 1.6% in the series A it grows to 340,000 Series B, in this scenario, these funding models, it grows to $446,000. And then if you have a Series C, then $590,000, you're now up to about $600,000 in extra dilution. Once that company gets acquired, let's assume it's a $200 million, $210 million acquisition, that 1.62% has now grown to a little over a million dollars in extra dilution. Okay. So 1.62% adds up. All right. So let me cover a couple of things, just finishing off some topics for completeness. There are several safe options. So it's not only is it pre-money and post-mONEY, there's also four different types of saves. You have a discount save, where the conversion math is affected by a discount that you offer. It's usually 20%. So conceptually, how that works is that if the investor buys stock at a dollar a share, if you have a save with a 20% discount, you would get your shares at 80 cents. Pretty simple and straightforward. There's also a valuation cap that as the company grows in value, there's cap limits the math on the valuation of the company to convert the shares, okay? There's also a discount plus valuation cap variant, okay, but this version is no longer distributed by Y Combinator, and then there's another one called Most Favored Nation where an earlier investor, if an early investor is followed by a later investor who got better terms, then the early investor gets the better terms from the later investor. Okay. So that's just to avoid obviously people getting an attitude about, hey, I invested early, but how come the person after me got a better deal? All right. So four different variants, how are they used? OK, this is another card analytics where it shows the VAL cap and discount version is shrinking. The dark blue, the big bar on the left, that's the valuation cap only. So about two thirds of the safes are VAL Cap only. And even though 26 percent or about one quarter safes or VALCap plus discount, you see it shrinking from 40 percent in 2021 to 26 percent today. Okay. So if you look at the, again, the simple agreement for future equity, the template in December, it was the pre-money safe and they had the four versions available. Then in 2018, they updated it with the post-moneysafe, the version 1.0, also the same four version. But then came version 1.1. The ValCap discount was removed from the documentation set. Then version 1 dot 2 came up. They made a couple of more of the legal changes. The val cap and discount was also is still no longer available. And then they also snuck in a little revision to the most favored nation version of the safe. and they called that version 1.3. So we have version 0.9 through 1.4. 1.1.3, okay? So availability, pre-money safe is not available from Y Combinator anymore. And the post-mONEYSAFE is not available fromY Combinater. Oh, excuse me, not the post money safe. The discount plus valuation cap. Sorry about that. I misspoke, okay. So conceptually of the four variants of the safe, most of them are ValCap version or some of them 26% still VAL cap plus discount, which means 92% of safes have at least a valuation cap. 8% use the discount only, and less than 1% use The Most Favored Nation version. There are other changes that happened in the 0.9 pre-money safe as well to the post-mONEY version. I already mentioned the founder dilution. There's more dilution now with the post money safe. The ownership math is more simple though. The general positioning, the pre-MONEY safe was meant to be a bridge round but today most of the safes are almost treated as if it's a standalone financing round which means you're using a small tool that was meant to do one narrow thing and you're now using it over and over again which as you scale the usage you don't always get the behavior that you that you were originally expecting the pre-money safe is fading most people don't even know what it is anymore the post-moneysafe is now well established especially if you're in the Silicon Valley. There's also a lot of key low-level details that changed. A lot of legal terms in the post-money safe were cleaned up, okay? And I summarized some of it here, okay. I do apologize because I've tried to go fast because I knew this was going to cover a lot of detail, but it's already been too much, okay, so I'm going to keep going and start wrapping up and try to address some of the questions towards the end here. So how does this all work? Who are all the players? What is it? How does it work out? Ultimately, investors are trying to, excuse me, founders are trying to raise funds. So your goal as a founder is preserve cash and preserve your equity by minimizing your cost and minimizing your delusion. Investors want to maximize their ROI by getting the best terms, both the valuation as well as legal terms. remember, Y Combinator is an investor. They're one of the most profitable companies in the world. They make their money from investments. So keep that in mind when Y Comminator issues, guidance, et cetera. They are very founder friendly in general, but ultimately they make their money as an investor, so founders, lawyers want to increase billable hours by advocating founders. Investors, lawyers, want to be billable by paying for the investors. What are we coming to play fundable startups well we sell premium training by proving premium value okay lots of training out there very few of it i if you've paid attention i don't think of very many other training classes go to this level of detail okay carta is involved here because they want to increase their subscribers by automating deals and you know providing tools where everybody just uses carta right so follow the money why are people doing what they're doing so what's the takeaway okay am i saying post money safes are evil because they increase founder dilution okay should you demand a pre-money safe well i don't think so i'm not trying to say that um what i am trying to highlight though it's about your attractiveness and your leverage okay who is the preferable date the you know frankenstein on the left or you know somebody who looks like they've got their life together on the right okay and when you um when you are more attractive you are able to actually uh have more influence i'm gonna skip some of this content here because i want to go towards the the end here um so why do people use safes okay if you have a choice between the apple and the donut well i'm sorry i love donuts okay they're fast they're easy they're cheap they defer the valuation they taste good etc okay um but that also involves a number of trade-offs okay fast easy cheap that uh tips the scale and the deferred valuation that tips the skill in one direction but if there's a cost on the other side there's cap table clarity problems there's taxation uh risks uh with qsbs which is a huge deal if you're an investor and if you are a founder too actually uh there's extra founder dilution and there's a challenge of the zombie safes okay i think unfortunately um in the same quote from a post from uh peter walker he talks about how different investors have different levels of sophistication okay and or fund or economic strategies okay most people just want to get the deal done which is why they use a safe because it's quick and easy but um inthe landscape of the funding vehicles early stage funding vehicles, if you look at the complexity of terms on the vertical axis and the certainty of the equity on the horizontal axis, that equity certainty is questions like how close is this transaction to a stock sale, which is important for QSBS, and how much equity was sold so that you know, all right, how much activity you have left. Okay. So that naturally provides a two by two matrix. A convertible note is roughly, in my opinion, right there on the center left. A pre-money safe is in the upper left corner. A post-moneysafe is kind of top. Then you have your series A financing round, which is usually done with NVCA model documents. It's 200 pages worth of legal contracts. This is a very heavy lift because it's so much legal work. Another attorney, Ted Wang over at Fenwick, used to be at Fenwicke, he created a lighter weight version called a series seed model contract. And then there's several other attorneys who created even lighter weight versions. I've had two webinars, one on the series safe, one of the series first from the attorneys who've actually gone through that. And conceptually, if you drew a line, a path through these various instruments, this is the pathway, the general journey. Okay. If you can get into the upper right-hand corner, especially since that results in preferred stock sale, like Peter Walker talks about, then I think you're in a better spot. The numbers in each of the circles is the number of pages in the model document template. So as you can guess, the more pages, probably the more complex it's going to be. Okay. So safe trends, dilution impact. To summarize, almost all safes today are post-money safes okay um that means that founders will absorb more dilution when they sign safes um in in addition startups are starting to sign 20 or more safes before the priced round which the impact is stacking all these safes will increase your founder dilution and make it even more difficult to calculate remember that illustration with the 1.62 that was 12 safes so if the stacking 20 plus safes comes into play, you might have more than 1% or 2% of extra dilution. The total value funds being raised on safes is growing. It used to be anything over $2 million raise was usually a priced round. Now it's getting to be $3 and $4 million raises are still being done on safES before a priced round is done, which increases your founder dilution again. In the past, founders rarely had to build pro formas to be able to see the safe dilution, because if you just do one or two or three saves, maybe it's not that big of a deal. But once you're stacking 10, 20 saves on top, you really need to beable to build that pro forma calculation to avoid being surprised when the price round happens. So where does that lead us with our startup training? Okay. So this has been a lot of content. I apologize for overwhelming you, but I did warn you at the beginning, it's a lot of content. Why do we do what we do? Why do we build our training? One is that we have what why do we think our training is different? Okay, we have a structured journey to fundability. Okay, мы have a startup roadmap, and a blueprint, most startup training, just random content with no specific journey. Okay. I am a engineer. So that means methodology and process is important. That structured journey is my process. And I tie that into the how i built the training i also have lots of experience as a seasoned operator i've been a ceo once a cto once and a technical vp three times i've gone through four acquisitions actually as an employee four acquisutions and seeing two shutdowns i actually learned more from the companies that shut down than the companies i got acquired most people um in the startup space a lot of them got lucky one time but can they really repeat that level of success Don't know. Okay. The other aspect that you've seen clearly from this session is I have a lot of deep dive content. I'm not a fan of one minute soundbites. There's actually somebody out there to talk about one minute business tips in the startup space. You might learn an interesting soundbite, but it's usually not transformative. Startups are hard and it takes a lot more than a one minute little soundbITE to be able to make an impact. You can also see that a lot of our content is very visual lots of other third-party training is very very dull and reads like the dictionary now this stuff is hard and when you're reading bullet points on slides that your eyes start to get cross-eyed at least mine do okay um and then in addition a lot of the training i have includes ready-to-use templates remember that due diligence class includes 22 tools and templates so the class teaches a best practice then the template and the tool gives you the framework to be able to implement the best practice. Most other training doesn't have any such templates. So I have a process. Again, I'm a process person. Five steps to reseed funds, prepare, plan, execute, sell, and close. I have other training that covers this. It's about building fundability before you try to fundraise. And fundamentally, our training aligns with that process. So these are examples of the training classes in my training program. I've got a ton of testimonials from folks who've gone through the training. this one here from one party said that one customer one founder actually said that was the most efficient breakdown of a complex topic I've seen in all my fumbling around with different startup content okay I even have an attorney who actually recommends my training to a lot of his clients because he actually states the training videos can save his clients a ton of money so this will be my last slide I'll stay a little bit longer to take some questions but fundamentally if you want access to the training, the QR code on the left will give you a 20% discount on the entire training package. Let me go ahead. If your QR code does not scan for some reason, this is the clickable link in the chat for the premium training. Or if you may not be a fan of online training, again, I try to make it very engaging and very visual and interactive. But If that's not your cup of tea, that's okay. You can still book a coaching session on my calendar if you'd like some more detail. I know this was a lot of information, but this is how complex the startup stuff is, and it gets deeper and deeper and deeper. Okay. So I'm going to go ahead and start to go through some of the questions in the QA. I'll thank you again for staying late. I apologize for going long. Let's see, back up here. Okay. Okay, so there's a question. If you still want to use the pre-money safe, are there good alternatives to the original YC version? And the answer is yes. If you go to a seasoned startup attorney, they probably have the pre-money safe template saved on their computer somewhere. I have it as well. In addition, Carta, with their safe automation, they will allow you to choose a pre-Money Safe if you choose to use their template. Their template is somewhat different from the YCometer's version. And one challenge is if you use the Carta version, then some investors might slow down the the fundraise process because they're like what is this i got to read all the detail in the legal language okay um let's see here okay so there's chatter about using potentially a pre-money safe and etc um i would encourage you if you are interested to um if you're concerned about the extra dilution um uh consider some of the uh other instruments here the series safe the series first you can reach out to me happy to connect you um if we did a coaching call i can kind of give you my best perspective on um where you're at what options might fit best for you before you start spending money with an attorney okay um so the other thing i would say is that make sure you don't overcompensate on the dilution issue. And what I mean is this. If your investor says, I will only do a post-money safe, don't pound the table and say, you as a founder will only sign a pre-moneysafe. Unless you are way oversubscribed, investors are beating down your door to invest in you, you might have to just absorb the extra dilution and just, hey, that's that's the cost of doing business okay um don't uh kill a deal just to save one point of dilution however what i do want to say is make sure you know what you're getting into if you absorb if you choose to accept the extra dilution do that with both eyes open do that knowing how much that's going to affect you so that you know if you know you're going to take extra dilusion then um that may change how much how fast you spend your money or how aggressively you seek the next round okay okay if pre-seed is difficult to nail the valuation of the angels what is the alternative to safe how do you do a priced round so early oh okay uh very good question from noel um yes pre-seat yes is very difficult to be able to visualize the uh dilution and that's where um this particular slide here the series safe or the series first may be of interest to you okay I was actually working on a price round with, I was going to lead a price round with a startup that came through Band of Angels. It was probably going to be around a million dollar round and it didn't make sense for us to do the NVCA docs so that's one of the reasons why I looked into the Series Safe or the Series First because they are much lighter weight. Side note, on that particular startup, ended up not investing or excuse me the investment was put on hold because we found tons of issues with their diligence okay um remember that due diligence class that i highlighted earlier that is one of the classes that's included in the premium training pack um the premium trading pack is a thousand dollars the 20 discounts 800 roughly but if you uh only want to get access to that um due diligence class by itself, then you can buy it a la carte. Okay. It's in the chat window. All right. Okay. Given we are pretty go-ahead stage with only an MVP, which fundraising is most important between safe, convertible, no price openers, recommended equity allocation values and campaign founders considered at this stage? Okay. A fairly detailed question from somebody says that um um they've only gotten their startup to an mvp stage what instrument is best okay and the answer is it depends on your situation uh depends on what you want to do with the company it depends on how much you've de-risked the startup now i talked a lot about building a fundable company before you fundraise and it really comes down to uh that um in general if i was doing this from day one, if I'm doing some very small fundraisers of $25,000 or so, then I probably just path of least resistance, do a safe post money safe. Okay. The small dollar amount does, even though it increases your dilution, because the safe dollar amount is only $25000. You were talking about 0.02% or 0.04% or whatever depends on the terms and conditions and stuff. It's not a big hit. It's when you start getting larger dollar amounts and you start raising many, many safes, that's when the dilution starts to bite you. So to get started, to get things done quickly, probably do a post-money safe. But once you start rising more than half a million dollars or so, you may want to consider, or even once you raise more than 100,000, you may wanna consider doing the series safe and the series first in the upper right-hand corner of this two-by-two matrix, right? But again, it all comes down on a situation-by situation basis, okay? And if I had a chance to dig into the details of your situation, I might have a different opinion, okay. All right, okay, question. What percentage of raises are pre-revenue nowadays? I don't have a good stat on that, unfortunately, Wade. But I would say that more and more startups that raise are post-revenue, unless they're in certain industries like hard tech or pharma or whatever, where revenue is, you know, five to 10 years out down the road. most companies more and more companies are starting to have revenue in order to justify a reasonable valuation on the raise okay uh again certain industries can be uh exceptions ai is hot just about you know back in the early 2000s anything.com got uh funding today anything.ai seems to get funding all right um let's see from a founder point of view maybe that's the investors common stock rather than prefer some you could find some investors who agree this um so this is a more straightforward question uh should a founder is it better to sell common stock okay and in most cases the answer is generally no okay um professional sophisticated investors do not want common stock okay um it does not give them rights and privileges which is going to be be important for them if they're going to be involved in helping the add value to the company preferred stock will give them more rights and privileges that they seek okay the other concern about raise selling common stock is that that sets your fair market value okay and that's the entire 409a question where in most cases it's preferable for a startup to try to keep the common stock share price low for as long as they can but the moment you share or sell common stock again as a founder perspective when you sell stock you want that stock price to be as high as possible so you sell so you dilute yourself as little as possible. So you have a tension here of if you sell common stock you're you you want for the purpose of this transaction sale you want the common stock price to be high but for the purpose of equity um um and uh uh stock option strike price you want it low so selling common stock goes against the the general goals okay all right let me talk about uh vehicles with small checks i think i'm doing a side letter with our saves to give us rights to move small checks to a future roll up you okay um there's a question here about uh what what to do if you have lots of small checks uh lots of ten twenty thousand dollar checks whatever um it you can do a roll-up vehicle to be able to aggregate that but it's it's more work okay there are third-party websites that will help you with that and you have to pay a fee uh pretty much uh perpetually until the end of time until um that roll-op vehicle goes the need for that goes away which can be years and years down the road okay um so you could do that um And I generally don't see individual startups going down that path, even though there may be some value. From a band of angels perspective, the band has 150 members, and let's say 10 of the members want to write a check to a company that pitched. To avoid getting 10 individual checks, the Band already has a roll-up vehicle. So we will do that for you. It's no cost to the founder. Okay. All right. okay uh i think there's a repeat of the question i just answered all right i don't see any of the questions uh thank you very much for uh staying long and hopefully this was useful uh do take do consider some of the training because we put a lot of time and effort into it we try to capture as much value as possible in the training um uh because my coaching hours are much uh much shorter supply um and much more expensive okay so since the training has the 30-day money-back guarantee it's really uh we try to make it a very low risk proposition for people to invest in the training if you buy the training course training package and you want some direction on uh which classes to start with i'd be happy to do a quick initial consultation to kind of point you in the right direction and say go to this class first this class next etc based on what you've told me about your startup okay uh consists dollar ranges for series safe series first safe preferred okay so um if you choose to do a um one of the new emerging um priced rounds uh with a series safe a series first or a series safe preferred um dollar ranges yeah you could do it for as little as uh maybe twenty five thousand dollars there is a potentially a small um legal cost could be a thousand or so dollars or so so that's why you probably don't want to do it for a micro investment of under 10k okay um but once you're hitting around to the twenty five thousand dollar range it can make sense um so probably the uh the best thing to do is if you want more detail about the rhythm and flow maybe we could just do a quick coaching call okay and yes I do plan to record the webinar my one of my team members is off on off on vacation so it might take me a little while to get it up on YouTube but I do plan to post this up on youtube okay thank you much sorry for the overwhelming flow of information but hopefully, uh, you were able to retain some of it. 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