01:51and the the way the course is organized
01:55is there's a lecture and then there's a
01:56QA afterwards so please hold your
01:58questions until the Q&A session at the
02:02end unless the an instructor explicitly
02:04says they want questions during their
02:06talk I will also take questions from the
02:13streaming audience too to ask a question
02:17please use the Twitter hash tag pound
02:21ycs is and will take as many of those
02:24questions as we can time willing so
02:31there's a mixture here of watching a
02:34class of accredited and non-accredited
02:35investors for the accredited investors
02:41as most of you know we are going to be
02:43an extent going to be extending an
02:45invite to YC winter 2018 demo days which
02:50are March 19th and 20th it's a virtual
02:52invite you can watch it online but also
02:54as a cool little kicker we're going to
02:57invite randomly ten of you to come in
03:00person to YC demo day which is which is
03:03kind of a pretty special occasion and
03:05and I hope I hope whoever comes enjoys
03:08it a lot so this is our first time
03:15teaching this class hopefully not the
03:18last we do ask you guys to give us
03:21feedback for what worked what didn't
03:23work what was too obvious or too subtle
03:25what was missing at the end of the class
03:27will be a survey I'll say this again at
03:29the end but please do give us feedback
03:31you can also give us feedback real-time
03:34as you like you can email me at Jeff GE
03:36o FF at Y Combinator comm anytime you
03:38like honest opinions are great I want to
03:43start off also by pointing out I won't
03:46be up here very much it's mostly a bunch
03:48of instructors from inside and outside
03:50YC they're all volunteers and they're
03:52very busy people and they've been
03:53gracious enough to donate their
03:56incredible experience and time to us and
03:58I'm I'm very grateful for everyone who
04:00said who agreed to do this
04:05before we get started I wanted to spend
04:07a couple of minutes saying why talking
04:10about why we're doing this
04:13how many of you have made angel
04:15investments before could you raise your
04:16hands so you don't need any of this crap
04:19you guys have already done this okay so
04:21there's a lot of experience and we know
04:23there's a lot of experience but we're
04:27doing this for mainly two reasons one is
04:30that angel and seed investors are a
04:33critical part of this startup ecosystem
04:35it's the first money in usually it's
04:37what allows companies to actually take
04:39flight and and become real big
04:42interesting scalable companies it's also
04:46a little self-serving we think that more
04:48great angel investors great seed
04:50investors are great for YC companies and
04:53we hope you will invest in YC companies
04:55the we also think it's good for you for
04:58people people who have all of you who
05:00have invested you know it's an amazing
05:01way to get a window into the to the
05:04future to be part of this future that
05:06that founders are really creating to get
05:09a window into what's going to happen so
05:11so it's all good what are we hoping the
05:15outcomes will be venture investing has
05:19been around for hundreds of years but
05:24really the kind of venture investing
05:26that that we think of in Silicon Valley
05:27for the last 50 years this guy named
05:29George doriel made made a he was a VC he
05:33was an early VC this firm called AR DC
05:36and he made what we'd consider a seed
05:38investment of $70,000 in 1957 until this
05:42new tiny computer company called Digital
05:45Equipment Corporation sometimes called
05:48digital often called DAC and that
05:50$70,000 turned into 35 million dollars
05:54which a lot of people found pretty
05:56interesting that led to what
05:59kick-started an incredible flowering of
06:01innovation and and a lot of wealth
06:03creation that that has never seen the
06:07like in the world and we hope that some
06:12of y'all had that same experience
06:13hopefully investing in YC companies it's
06:17and there's lots of examples and if
06:19we're lucky some of the folks who are
06:21gonna talk to you we'll give you some of
06:26so we also hope that you all go to be
06:29better smarter investors after this
06:32course I'm sure that's why some of you
06:35are here some of you are here to get
06:37some of those insights and I'm sure also
06:39that you will tell us if if we achieve
06:41that goal and lastly we want to create a
06:45permanent repository of this information
06:48so anyone can make use of it in future
06:54years so we hope to make the repository
06:57better and better and in fact if there's
06:59anything that you all you can you can
07:00look at this online that investors that
07:03and if there's anything you think we
07:05should add just mail it to start-up
07:07school at Y Combinator calm and well
07:12we'll look at it and if we like it we'll
07:13add it ok very briefly now we have four
07:22days about ten hours so we can only
07:26cover so much this is going to be about
07:28the fundamentals of startup investing
07:31there will be a few deeper dives but not
07:33that many we want to hit the major
07:35points kind of like a an investing 101 I
07:41guess we will start off with fundamental
07:44questions of why how and which companies
07:47and that's today and then we'll talk
07:50about the mechanics of startup investing
07:54clearly many of you know these mechanics
07:56but I think we'll cover it perhaps in
07:59ways you haven't seen before then we're
08:03going to walk through some of the dance
08:04that you have to do to make your
08:07decisions and to to talk with
08:08entrepreneurs and founders and and
08:12figure out which are the companies that
08:13are going to be part of of your
08:15investing future we're going to hear
08:18from a bunch of extraordinarily
08:20experienced and talented at least by the
08:24results investors during the course and
08:28and then we're going to complete with a
08:31a little bit of context and and a little
08:35bit of a look towards the the future of
08:37startup investing startup investing has
08:39changed radically over the last decade
08:42and I think most of ex-us expect a lot
08:45more changes in the next decade as well
08:48and in the end we'll finish up with a
08:52conversation about the role that you all
08:55can and may want to play as you think
09:00about your role as an investor and what
09:03I hope you all make it to the end I
09:06think it's going to be really useful and
09:08I think we have a pretty great lineup of
09:10instructors that'll be very relevant and
09:14useful to everyone so with that I'm
09:17going to turn it over to our first
09:19speaker Sam Altman the president of Y
09:23Combinator who actually had the original
09:25idea for this course so I'm pretty
09:27grateful for that and he's also the man
09:30who has said you want to sound crazy but
09:34you want to actually be right Sam
09:45thank you Jeff and thank you all for
09:49coming this is it's cool to see so many
09:51people in the room so I want to talk
09:54about why how and and what to do to
09:58invest in startups I'm only gonna talk a
10:00little bit about why especially given
10:02how many of you already invest in
10:04startups but I did do something to get
10:06ready for this class which was I asked
10:09some of the best investors I know why
10:11they invest in startups and I contract
10:14Oh Steven I think it's automatically
10:16advancing no problem so and then I
10:22compared that with reasons I've heard
10:23from other people who I don't think are
10:25as good and I think it is worth thinking
10:27about why the people who have sort of
10:30done the best in the field what their
10:31motivations are to invest perfect this
10:36was one I heard from a few people these
10:38exact three words from a few different
10:39people and this resonates with me the
10:42thing that I like the most about
10:43investing in startups is that it's
10:44energizing I feel like I am constantly
10:47on working with people that are not
10:49burned out on the world at all they have
10:50unlimited energy they have new ideas and
10:53they have the sort of the beauty of
10:55inexperience and they don't know they're
10:57your people that are doing things for
10:59the first time are willing to do things
11:00that anyone who has got a few more
11:03battle scars won't try and that is
11:05incredibly energizing to be around help
11:09shaping the future was something that
11:10the very best investors said again and
11:12again and as part of that the leverage
11:16on time the ability to work on multiple
11:18things came up again and again and again
11:22most of the time you lose one extra
11:24money but occasionally you do get to
11:26make a hundred or a thousand decks and
11:28that for the same reason slot machines
11:31are so satisfying is incredibly
11:33addictive it's also satisfying because
11:37every once in a while a founder of a
11:39great company who is you know no super
11:41famous will tell you hey that thing you
11:43did for me eight or ten years ago was
11:46this make or break difference to my
11:47entire career and that's that's deeply
11:50gratifying you get to be around some of
11:54the most talented people in the world
11:56there is this sense of just
11:58endless optimism around the future that
12:01is really important to my own personal
12:02happiness to be around and I haven't
12:04found that in too many other places in
12:06the world besides startup founders it's
12:10incredibly humbling I write on the back
12:13of every stock certificate on a post-it
12:15note my confidence interval and what I
12:16thought was gonna happen with the
12:17company and you get used to being wrong
12:20a lot and that framework that mental
12:24adjustment that you know you're usually
12:26gonna be wrong that has been helpful to
12:28me and everything else I've done in life
12:29you do learn a lot though and if you if
12:33you treat this as something that you're
12:35gonna try to get better at and sort of
12:37deliberately practice ah you can learn a
12:41lot and you can get better at this
12:42really quickly all right so now I want
12:46to move into the two main sections the
12:48how and the what the number one mistake
12:53that I used to make when I started
12:55investing was actually not a
12:57misunderstanding of the power law the
12:58number one mistake was that I cared too
13:00much about what other investors thought
13:01and the sooner you can free yourself of
13:03this the better the I think this is a
13:06very common mistake that people make
13:08when they start investing you get very
13:10swayed by what previously successful
13:13investors think the first question that
13:15most people ask why see startups is who
13:17else is invested in year round people
13:19totally outsource I would say 80% of
13:23investors outsource 80% of their
13:25decision-making to what other people
13:27think about an investment opportunity
13:28the problem is everyone does that
13:31and so there's this weird schooling
13:33effect where a company gets hot for no
13:35discernible reason or it fits a trend or
13:37whatever and then everybody wants to
13:39invest in one company and it's just
13:41because a few people decided they liked
13:43it so the number one mistake I made was
13:46to be too swayed by what other investors
13:48thought good and bad about a company
13:49after I corrected for that the second
13:54biggest mistake I made was not investing
13:55the power and not understanding the
13:56power law the power law means that your
14:00single best investment will be worth
14:03more to you in return than all of the
14:05rest of your investments put together
14:06your second best will be better than 3
14:09through infinity put together
14:11and this is like a deeply true thing
14:13that most investors find and this is so
14:16counterintuitive that it means almost
14:18everyone invests the wrong way so the
14:20question that you should be thinking
14:22about the question that most people
14:24think about when they start angel
14:25investing is can I hit a bunch of
14:27singles and in most other kinds of
14:30investing that's the right way to do it
14:31you know if you're going to invest in
14:32stocks or bonds or whatever that's how
14:34you do it you're just compounding
14:35singles for a long time but angel
14:39investing is a business of homeruns and
14:40you want to look for things that can be
14:43potential homeruns and we're going to
14:45talk about that again and again through
14:46this but this is I think the most
14:48important thing to learn and the thing
14:51that most investors get wrong so it's
14:54all about it's all about the magnitude
14:59if your biggest success it is not about
15:01the failure rate most investors talk
15:04about their failure rate still you know
15:05when we have people that are trying to
15:07build angel firms come talk the question
15:10the first question they ask is what is
15:12your failure rate what's an acceptable
15:13failure rate totally the wrong question
15:15totally the wrong way to think about
15:17angel investing you can have 95% of your
15:20investments fail if one of them returns
15:22a billion dollars and you'll be totally
15:23happy and so this is what you want to
15:27think about the first question that I
15:28try to ask myself when I meet a start-up
15:31is not why is it going to fail it's not
15:33what could go wrong the first question
15:35is how big could this be if it works can
15:38I imagine this founder this idea this
15:40market supporting a you know massive
15:44massive company and then I think about
15:47all the things that could go wrong but I
15:48found that if I thought about what could
15:50go wrong first I filtered out the
15:51companies that could be giant the
15:53companies that could be giant are at
15:54this intersection of sounds like a bad
15:57idea is a good idea and because that's a
16:00very narrow intersection and because
16:02they sound like a bad idea the best
16:04investments are the ones that are
16:05easiest to talk yourself out of if you
16:07start off thinking about why they could
16:08go wrong so then there's a question
16:12about how do you find these companies
16:14how do you find the companies that can
16:15be the handful of companies that get
16:18started every decade that are
16:20responsible for almost all of the
16:22returns just to put some numbers on the
16:26YC has funded I think around 1,600
16:29companies maybe 1700 our top five
16:33companies represent about two-thirds of
16:36the value that we've created and our top
16:38one company represents about one third
16:39so this is like a nearly one-third so
16:43this is like this very extreme very
16:44counterintuitive thing all right how do
16:46you find these companies another thing
16:50that I think is surprising is many of
16:52these companies that are sort of a
16:54generation-defining companies are
16:56started by people who are out of network
16:59who are not well-known who are not sort
17:01of the people that you know can start a
17:05company and get a bunch of press right
17:06away and so you have to find these and
17:09that the best way to do that is from
17:11other founders this is part of what we
17:14try to do at YC is we try to get our
17:16founders to like us so much that they
17:18refer all of their friends to us because
17:21they say these you know YC creates so
17:23much more value than it takes you've got
17:25to go work with them and we this idea of
17:30as the way to find companies to invest
17:33in has been great if you're just
17:34starting out I think what I have seen
17:36the most successful angel investors do
17:39is just start helping founders for free
17:41realizing they may not get to invest in
17:43those companies but that they'll get the
17:45referrals down the road and so much of
17:47this is about people connecting you to
17:49other people that you don't know we
17:52talked about this at YC this value of an
17:53open network a lot of angel investors
17:56like to brag about how difficult it is
17:58to get a meeting with them how you have
17:59to have a connection otherwise they'll
18:00never take you seriously and it's got to
18:03be from like you know someone they
18:05worked with a bunch and you've got to be
18:06well-known and experienced and we just
18:09make it really clear anyone in the world
18:11can go to our website click apply
18:13we try to respond to emails to people
18:14that email us we take people seriously
18:17that have no personal brand no
18:19reputation no network we ask people that
18:23are in our network to connect us to the
18:25most promising people they know that we
18:27don't already know but this idea that
18:29were available and we're open I think
18:33this was in the two or three most
18:35important secrets of YC this was
18:37something that we did that was
18:39different other people hadn't done it
18:40before in fact people bragged about the
18:42opposite and we went totally other
18:44direction and I strongly recommend this
18:46be be open to that random email that
18:49comes in be open to the introduction of
18:51someone that on paper doesn't seem like
18:54you know that there's someone you want
18:56to meet nine times out of ten you waste
18:57your time that other time makes it
19:00totally worth it so one big shift that's
19:05happened in the last ten years
19:07I'd say or maybe 15 even is there now
19:09way more people that want to invest in
19:12good startups than there are good
19:14startups and so it founders have really
19:18become in the driver's seat founders
19:20founders of good companies have a lot of
19:22choice when it comes to investors and
19:24founders talk a lot now the network has
19:26gotten big enough that the asymmetry
19:28that used to exist where investors had a
19:30lot of leverage is gone and I don't
19:32think it will come back anytime soon
19:35your reputation matters a lot it is way
19:38more important to your future success as
19:40an investor that founders like you and
19:43say that investor did the right thing by
19:44me than it is that you squeeze out you
19:47know a few drops of juice from a failing
19:49company the number of investors that I
19:51have seen do incredible long-term damage
19:53to their reputation by fighting over the
19:56carcass of a company that was never
19:57because of the power law going to matter
19:59to them anyway but try to get out you
20:01know ten thousand dollars or whatever
20:02from a dying company if you're playing
20:05the long game that's not worth it
20:06reputation especially reputation when a
20:09company is going badly is super super
20:11important and I think that is the secret
20:16at this point in sort of 2018 Silicon
20:19Valley to doing deals the thing that we
20:22tell founders to do and the thing that
20:24founders do anyway when they're trying
20:26to choose between a number of investors
20:28that all want to invest in their company
20:29is they they do reference checks on you
20:31just like you do on them and more and
20:35more the thing that I have seen founders
20:37use is the criteria to make the decision
20:40about which investors to work with is
20:44what the other founders that investor is
20:45fun to have to say and so I think this
20:48will this will continue to be important
20:49there are other things you can do I
20:52helping before you close the deal is
20:54good deciding quickly being clear about
20:57your reasoning being responsive being
21:00available all the things you want from a
21:01founder those all help to but but this
21:05reputation of being good to work with
21:07that goes a long way and people remember
21:09that for a long time
21:12the other question I get all the time is
21:14how do I get a good bargain like how do
21:16I get a better term than they're better
21:18terms than everybody else we recently
21:21had a company they had let's say you
21:24know ten investors and that we're gonna
21:25join their seed round every one of the
21:28ten had asked for advisor shares every
21:30one of the ten had said well unlike all
21:32those other investors
21:33I really do work super hard you know I'm
21:35the only investor in a round that
21:36usually gets advisor shares so you need
21:39to give them to participate and
21:40everybody asked for this all ten same
21:42thing I'm the only one I need advisor
21:44shares and I think you know a lot of
21:48people are just looking for a good deal
21:49because valuations feel high they have
21:51felt hi to me for eight seven years now
21:53I went back and looked at my destined us
21:59mminton vestments I've made have either
22:02been a ridiculous deal because no one
22:04else wanted to invest or a deal that
22:06felt incredibly expensive the more I was
22:10willing to sort of overpay in my mind to
22:13invest in a company often the better it
22:15did and especially when I felt like I
22:17was getting screwed if it was like a
22:19huge opera months after some other round
22:21it was painful I did it anyway I think
22:24because the companies that work
22:26sometimes work so fast and you're
22:28anchored to like what a fair deal is you
22:31got to watch out for this but my
22:33experience investing in startups is my
22:37best investments with one or two
22:38exceptions have been the deals that felt
22:40the most expensive to me and the one or
22:42two exceptions were companies where I
22:45understood something that no one else
22:46did and thus there was no competition
22:49other than that the company is where I
22:51like tried to value invest have not been
22:56value investing is not a winning
22:58strategy when it comes to being an angel
23:01investor most of the time
23:04all right I will try to go kind of fast
23:07to this to leave time for questions so
23:10there's a big question of what to invest
23:12in and here's the framework I use I will
23:16consider anything that I believe could
23:18be a ten billion dollar company and that
23:21is such a tight criteria I have no other
23:24rules so I am willing to look at any
23:26stage I'm willing to look at any sector
23:29I am willing to look at any business
23:30model there are other investors who have
23:33this like oh I only do this one thing at
23:35this one stage and maybe they make that
23:38work I have never figured out how to do
23:40that the good the great companies the
23:43companies that are in that number one
23:44spot on the power-law are so rare that I
23:48suggest you only select four things that
23:50can be there and other than that be
23:52really open-minded speaking of the
23:57really big companies I think I don't
24:00know if this was always true I suspect
24:01it may have been but I think today it is
24:04easier to start a hard company than an
24:06easy company and this sounds super
24:08counterintuitive but if you're gonna
24:10build a really big company you got to
24:12convince people to come work with you to
24:14pay attention to you to write press
24:15articles about you to care about you to
24:17advise you and if you are starting the
24:19twenty two thousand the photo-sharing
24:21application it's really hard if you are
24:24starting a nuclear fusion company a lot
24:26of people want to help with that and I
24:29think especially for the companies that
24:31end up breaking out this is really
24:34important you know this thing that is so
24:36interesting people proactively want to
24:38help you for free want to come be part
24:39of your team whatever this is something
24:42to look for so like is this a company
24:45that I believe will be able to recruit
24:47hundreds of really talented people who
24:49could otherwise start their own
24:50companies is a super important filter
24:52that I don't think people think about
24:54enough one thing that we've learned at
24:57YC is to mostly pick the founders it is
25:01difficult to hear an idea at the very
25:05early stage and say yeah this idea has
25:07what it takes to be a ten billion dollar
25:09company you can say an idea doesn't have
25:11it which we'll talk about but it's
25:13difficult to say this is for sure the
25:18I think you can with practice identify
25:20founders and I'm going to talk about how
25:22that have it have a chance at creating
25:24one of these companies Paul boo hi one
25:27of our partners made a list of the four
25:28traits that he thought founders that go
25:31on to create giant companies have and
25:32they are obsession focused formality and
25:35love um he said this sort of in passing
25:38in a meeting like two or three years ago
25:39I've thought about it a lot since
25:42there's there's other obvious things
25:44that everyone screens for but pay
25:48attention to these speaking of the
25:51obvious things that everyone screens for
25:54intelligence is really important you can
25:56give a founder an idea and they can
26:01start a company the problem is they need
26:04to come up with new ideas for a company
26:06basically like every week you have to
26:08come up with crazy new ideas big changes
26:10all the time we we tried an experiment
26:12once at YC we funded twenty teams of
26:16strong founders that didn't have ideas
26:17but were otherwise really good and what
26:20we learned they all failed and what we
26:21learned is that the good founders are
26:24the people that have ideas all the time
26:26so there's an intelligence components to
26:28this there's a creativity component to
26:30this there is an ability to think
26:32independent thoughts component to this
26:34but whatever you want to call this this
26:36idea of this particular kind of
26:38intelligence that leads to seeing
26:40problems in different ways and thinking
26:42of ideas that don't yet exist but should
26:44you've got to have that in a founder
26:49communication skills I think are one of
26:51the most important founder
26:56qualifications that people don't think
26:58about enough so so much of your job as a
27:01founder is about communication you are
27:04every time you hire someone every time
27:07you go raise money every time you try to
27:09sell the product every time you try and
27:11set a direction for the company you do
27:13it like a huge amount of a founders job
27:15is being an evangelist for the company
27:18and if you don't have really strong
27:22communication skills or if you don't
27:23develop them quickly
27:24you're at a big disadvantage think about
27:27their there are obviously famous
27:29exceptions to this but if you think
27:30about it on the whole
27:31the founders of the really super
27:33successful companies tend to be great
27:35communicators execution speed there's a
27:40lot of ways to measure this but and we
27:44talk about this a lot the need to sort
27:45of relentlessly execute as a founder
27:49this is incredibly correlated with
27:51success so one way we test this during
27:54YC is between office hours which we have
27:56every week or 10 days how much progress
27:59do the founders make how quickly do they
28:01take a new idea and try it and say hey I
28:04came back and I tried that this didn't
28:07work but this other thing did in the
28:08process I had these three new ideas I
28:09tried those just this relentless cadence
28:13of execution is incredibly predictive of
28:16success and it we had a joke once where
28:21the there were all these founders who
28:23are incredible on paper they never
28:26actually quickly they always have great
28:28reasons for why they didn't but they
28:31still never go and be successful and
28:32then there are these people who just
28:34like get an amazing amount of stuff done
28:36they their iteration speed the speed
28:40with which they can have a hypothesis
28:42tested and implement it is unbelievable
28:45that's really correlated with with huge
28:46success the rate of improvement of the
28:52founder so if you look at a founder who
28:57comes to meet you for a seed round and
29:00compare that founder to Brian Chesky you
29:02will be disappointed 100% of the time
29:05that is the wrong comparison you will
29:06never write a check however just like
29:11startups you look at the growth rate you
29:15should look at the growth rate of the
29:16founder as well so one thing that we can
29:19often tell over the 10 weeks of YC is
29:21how fast a founder is improving this is
29:23different than how fast the business is
29:25improving and you know like humans
29:30always underestimate exponential growth
29:32we're not we're not well evolved for
29:34that and so if you notice a founder who
29:36is improving incredibly quickly over the
29:38couple of months you get to know that
29:40founder pay a lot of attention again you
29:45won't get Brian Chesky in a first
29:47meeting but you can find people who are
29:48on a trajectory to develop into a Brian
29:51Chesky and that is super valuable this
29:54is one of those things where I have seen
29:57it you know maybe like 10 times in my
29:59career so far where I just knew that
30:01this founder was going to like develop
30:04into an incredible leader and it's
30:06basically been every time I felt it it's
30:07been right I really do trust this like
30:10this rate of improvement metric I think
30:14one thing you have to be increasingly
30:16aware of are the wrong motivations so
30:20starting a startup is a very long-term
30:23commitment you know if it's gonna work
30:25it takes more than a decade it's really
30:28hard there are a lot of days where you
30:29just want to give up and there are a lot
30:31of people now who start a startup
30:32because they think it is a way to get
30:34rich quickly and unfortunately it's just
30:38not so as startups have become the new
30:41default career trajectory for ambitious
30:44people there are a lot of people who are
30:46doing a start-up as a resume item or as
30:48a way to get rich quickly this does not
30:50work the amount of pain that you have to
30:53suffer for a start-up you realize at
30:55some point you know what I can do pretty
30:57well in any series of other jobs with
31:00much less risk and much less negative
31:02effect on my life so you really do want
31:06to stay focused on the mission driven
31:07founders again if we look at our own
31:10success and failures in our portfolio of
31:13YC every time we thought a company was
31:19going to go really well and didn't the
31:22company the founder did not have this
31:24deep sense of mission so it's something
31:25we really look for as a primary
31:27motivation and then another way I used
31:32to get tricked a lot is there were
31:34founders that I didn't think we're that
31:36good but they hate to stumble on a nice
31:37business or you know they had this
31:40metric that was growing pretty well or
31:41all of my other investor friends were
31:45investing and so I got scared and did it
31:46anyway but but I think this focus on
31:51truly exceptional founders like people
31:53that I'm like wow I want to go work for
31:54him or her is really important I've I've
31:58I have never once made a lot of money
32:01backing a founder that I thought was
32:02only okay but a business that was
32:04otherwise good I talked a little about
32:09this but we have a word of YC called
32:10scenesters this is different than people
32:12who just want to make a lot of money
32:13there are increasing number of people
32:15who just like want to be around startups
32:19and go to startup parties and talk about
32:21being a founder treat that as a red flag
32:24obviously low integrity people um that
32:27doesn't work out either okay um this is
32:31maybe the third biggest misunderstand
32:34you know I had and I think for many
32:35people it's their number one biggest
32:37misunderstanding people always say that
32:41what matters is not a startups current
32:43revenue but its growth rate and that's
32:45true however in the same sentence
32:47investors will say but the only thing I
32:49care about is the size of the market
32:50today and this is obviously ridiculous
32:53on its face right like if you think
32:55about the biggest companies today ten
32:58years ago many of those markets did not
33:00exist if you think about the size of the
33:02social networking market when Facebook
33:04started if you think about the size of
33:06ride-sharing apps when uber started
33:10that's a really bad metric and
33:12unfortunately it has become Dogma among
33:13investors that you know size of the
33:15market is the most important thing even
33:17really good investors say this I think
33:21they either I think they actually mean
33:23what they care about is the size of the
33:25market in ten years but they don't say
33:27and what you should care about of course
33:29is the size of the market in ten years
33:31if the market is huge today first of all
33:35you probably have a lot of big
33:36competitors already going after it big
33:39companies from doing that second of all
33:40you don't get to surf this wave of this
33:42new technological change that pulls
33:44startups along and creates a ton of
33:47value in a short period of time but you
33:49should prefer a small market growing
33:51super quickly to a very large market
33:54super counterintuitive if you chase the
33:57things that worked in the last set of
34:00companies which is what most investors
34:02do you know Facebook works they all want
34:04to fund more social networks
34:05uber works they want to fund more what
34:07ride-sharing apps that is much harder to
34:10do the second time it's far better
34:12but more difficult if you can identify
34:14the next rapidly growing market and
34:17invest there this is where this is where
34:22independent thought is really important
34:24if this is not something where you can
34:26just sort of follow what everybody else
34:28says by definition you've got to learn
34:30to form your own thoughts about about
34:33what the next really big market is going
34:34to be one way that I like to do this one
34:38way that I like to say you know is the
34:40market growing really quickly is to
34:43think about this question of whether
34:44something is a real trend or a fake
34:46trend and I'll talk about that in a
34:48second actually right now okay so it has
34:54almost become a joke to make fun of like
34:57angel investors moving like a school of
35:00fish after one you know declaring
35:02somebody's a hot trend and then two
35:04years later never talking about that
35:05again and saying well that just didn't
35:07work but so there's this question but
35:09sometimes they're right you know
35:11investors in Silicon Valley as a whole
35:13for example got mobile right as a thing
35:16in a big way but then they got most
35:18other things in the last ten years wrong
35:19and I think every time someone talks
35:21about a big trend my first reaction is
35:24skepticism and I suggest yours is as
35:26well okay but how do you differentiate
35:28between a real trend and a fake trend a
35:32real trend is one where although not
35:36that many people are participating yet
35:39the people who are use the platform a
35:42lot every day and tell their friends
35:45spontaneously how great it is so when
35:48the iPhone came out most of the mobile
35:51industry would make fun of it because
35:52Apple only sold a million or two million
35:54whatever it was in the first year but if
35:57you talk to anyone who had an iPhone
35:58they would say this is the greatest
36:00piece of like you know technology I've
36:02ever had people used it like many hours
36:05every day they it was absolutely
36:08life-changing so even though the number
36:10of people that had it were small you
36:11could identify that as a real trend
36:13because the people who had it were not
36:16only like daily active users but hourly
36:17active users and they were they were the
36:20best free advertising Apple could ever
36:22have hoped for because they told
36:24everyone like this is the future you've
36:26if you contrast that to something like I
36:29got to pick on somebody I'll pick
36:31virtual reality if you contrast that to
36:33virtual reality everyone talks about it
36:35is the next trend it may be in the
36:37future but today if you talk to people
36:39who have VR headsets they don't use them
36:42every hour they don't use them every day
36:43most of them don't use them every week
36:45they sit on shelves that has clearly not
36:48become a a real trend platform yet it
36:51may in the future and the point at which
36:53you know people that you know are a lot
36:56of people you know small number of
36:57people you know even start putting their
36:59headset on for hours every day and
37:01telling all their friends they've got to
37:02buy one it's the greatest thing in the
37:03world that is the time to start
37:05investing heavily in VR
37:20so so this question you know are people
37:23actually using the platform I think is a
37:25really important one when you're trying
37:26to think about you know the next
37:27technology wave and you do want to try
37:29to figure this out you do want to try to
37:30figure this out the certainly not all
37:35but most of the biggest technology
37:36companies get created soon after one of
37:39these massive platform shifts Sequoia
37:42says this thing that I've always liked
37:43which is you cannot create a technology
37:45wave that is well beyond the capability
37:49of a small company to do but you can
37:51surf one if you can find the wave and I
37:53think that's really important and I
37:54think it's actually like if you use this
37:57framework pretty reasonable to evaluate
38:02ok so I mentioned this a little bit
38:05earlier what you are looking for are
38:07good ideas that look like bad ideas
38:11these are things that you can articulate
38:13there is a reason that this is going to
38:16be huge that most of the world is
38:19unfortunately what most people end up
38:21chasing are bad ideas that look like
38:22good ideas I would say this is where
38:25like 90% of all angel capital and the
38:28startup ecosystem goes so this is
38:33something that is worth trying to avoid
38:34and the one very common way that people
38:39make this mistake bad ideas that look
38:41like good ideas are chasing the thing
38:45that worked 2 years ago and so if you
38:48ever find yourself doing that be very
38:50skeptical if you find yourself tempted
38:53to invest in one company where there's
38:55hundreds of others working the same
38:57thing be very skeptical if you find
39:00yourself tempted to work on something
39:02that the founders work super hard to
39:06convince you is not going to be a
39:07long-term commodity be very skeptical
39:10the more people talk about like it is
39:13absolutely true that you want to
39:15something that has real pricing power
39:18that comes from a network effect a moat
39:20a varied entry whatever it is but the
39:25more founders tried it like when that's
39:27true it's so obvious that the more
39:28founders try to sell you on why they're
39:30super differentiated and why they have
39:32this long-term competitive
39:34the more skeptical you should be but I
39:36have found this framework just trying to
39:38think about is this a good idea that
39:40seems bad or is this a bad idea that
39:42seems good I found that has helped me
39:45make good decisions a bunch of times
39:48this is sort of ycs mantra but it's so
39:51important that I want to talk about it
39:53again the the best companies all have
39:57great products unfortunately the current
40:00fashion in Silicon Valley I think has
40:04gone a little bit too away from this and
40:05it's too much about growth hacking and
40:08sales and marketing machines and
40:09everything else and that does work for a
40:12while you know you can get away actually
40:15for a pretty long while by executing
40:17really well to grow a mediocre product
40:21but you don't usually create like a
40:24Facebook size company by doing that and
40:27I think asking it become the companies
40:31often won't have a great product by the
40:33time you're making an angel investment
40:35but if you don't believe they can't
40:37won't get there at some point it I don't
40:41think it'll be a huge company most of
40:43the time and and here is the very simple
40:46framework I use for this if I think
40:48about all of the most successful
40:51internet and mobile startups I heard
40:54about those because this is like true
40:57for enterprise and consumer apps I heard
41:00about those because they were so good
41:01that one of my friends spontaneously
41:04told me about it they were not being
41:06incentivized to that was not they didn't
41:08mark it to me didn't advertise to me it
41:09was just like someone I trusted said you
41:12got to try this new thing it's amazing
41:13and if the startup is not gonna get
41:17there I think they will not be at that
41:21on your on your power-law of returns so
41:23I think this is like a really important
41:24filter related to that and I mentioned
41:29this earlier a little bit human
41:31intuitions about exponential growth are
41:32terrible we clearly had no evolutionary
41:35need for this we can like visualize
41:37linear growth very well we can like you
41:39know visualize the trajectory of an
41:40arrow very well we very few people that
41:43I have met actually maybe none can sort
41:47you know like let's say 25% monthly
41:50growth 1.25 to the 36th power is say
41:53where well it's coming to be in 36
41:54months it's really hard and it is how
41:58these companies get super valuable so I
42:02long ago learned to stop trying to trust
42:05my intuition on this now and I just
42:07model it out and I try to model the
42:09decay rate about how how much I think
42:11growth will slow down but I try to say
42:13okay you know given that this company is
42:15growing by word of mouth how big can it
42:18be in five years and yeah I've learned
42:21not to trust my intuition on that I
42:26mentioned this a little bit earlier but
42:29I wanted to mention this near the end of
42:31the presentation there are a whole bunch
42:33of words a whole bunch of different ways
42:35that people talk about this this is one
42:37of the most important concepts in
42:39start-up investing this is one of the
42:41things that differentiates investing in
42:44startups from investing in small
42:45businesses um you are looking for a
42:48company that gets more powerful as it
42:51gets bigger you are looking for a
42:53company that gets increasing pricing
42:54power as it gets bigger you were looking
42:56for a company that has an easier time
42:57getting more users as it gets bigger
42:59that gets harder to compete with as it
43:01gets bigger and you know this is often
43:05fairly obvious sometimes it's not
43:08sometimes you really have to think hard
43:10but you know like once you do you can
43:13come up with a story for it this is
43:16something that a lot of people get wrong
43:17because they get caught up in oh this is
43:19going this is so cool today this company
43:21has discovered this wonderful thing
43:23almost all of the value in a start-up is
43:27the you know revenue the earnings is
43:28going to generate in years 10 11 and 12
43:30from now and so if you can't answer this
43:34be pretty skeptical and then finally one
43:40other question that I like to think
43:41through before making an investment is
43:43what do I understand that other people
43:45don't there can be a lot of answers to
43:47this but this is this comes back to not
43:51basing your decision too much off the
43:53decision of other investors I like to
43:57understand in ax mum if I don't have an
43:59answer to this question
44:01I I don't feel like I have any
44:03competitive edge in there in that
44:05particular investment decision but and
44:09sometimes the answer this question is
44:10just like everyone's bullish on this
44:12company but I'm more bullish because I I
44:14understand a specific thing about this
44:16market and and everyone thinks it's good
44:19I think it's even better so I'll pay
44:20this very high valuation but this is a
44:23question that I have found helpful for
44:26me in in many scenarios all right
44:30unfortunately I took all the time but
44:31maybe I can do like five minutes of
44:32questions we definitely have time for
44:38some questions I just wanted to remind
44:40all the folks who are live-streaming
44:43that the hashtag for questions is is YC
44:47s is it's YC s is I think the beginning
44:51of the livestream might have missed that
44:53so please do send some questions and I
44:55you know we started a little late so
44:57perhaps running a little long and then
44:59we'll take a quick break
45:00Thanks all right yes what can a least
45:08age investors do to add a lot of value
45:09to founders almost all if you ask
45:12founders this which you know they're the
45:14customer here I think that makes sense
45:15almost always the number one thing they
45:17want help with is hiring so helping them
45:20find really good people help them
45:21interview you know back when I was sort
45:23of an active angel investor before YC I
45:25would tell founders like you can use me
45:27as much as you want for interviews like
45:29you I will I will help recruit I will
45:31help source people I well then I will
45:32help close I think people really like
45:34that help with future fundraising and
45:37then help with just sort of like
45:39everyone wants to like provide the big
45:41strategic advice and that is really
45:44valuable I think one of the things that
45:45I did well when I was an angel investor
45:48was I would just try to be available all
45:50the time for tactical advice so I would
45:52meet for like the big strategic what can
45:54this become advice and that's fun but I
45:56think a lot of it'll you comes just from
45:57being available at 11 o'clock on a
45:59Friday night when a founder needs a
46:01two-minute phone call for some emergency
46:02so super availability for tactical
46:05advice I think is good
46:12what flaws are acceptable in a founder
46:14and a you know series cedar series a
46:18stage um a lot I think like don't
46:21compromise on the things that don't get
46:24better like don't don't compromise on a
46:26boundary of integrity but if you think
46:29the founders improving fast I think I
46:32think a lot so I like I bucket this is
46:34traits that I believe can change and
46:36traits that I believe can't and if the
46:38founder is improving quickly and it's
46:39something that I think is changeable you
46:42know we've had many many very
46:45unsophisticated founders but that we're
46:47smart I wanted to learn and were you
46:49know doing this for the right reasons
46:51super mission oriented come through this
46:52door these doors and they have just
46:54progressed really fast so you know they
46:56were founders who I think had like no
47:00domain-specific knowledge about like one
47:03funny thing is when you are negotiated
47:07an investment a lot of the time a
47:09founder who's otherwise very good will
47:10have no idea because they've never done
47:12this before and it kind of spooks you
47:13you're like wow you don't know what like
47:14evaluation is and that's the kind of
47:16thing that's like that's a father that's
47:25how do you judge for integrity with a
47:28founder that comes out of network so in
47:31our experience we we've gotten this
47:33wrong a handful of times but we have
47:35prevented ourselves from this mistake
47:37hundreds of times because even in our 10
47:40minute interview if you give like a
47:41founder a chance to sort of tell you
47:43about the unethical things they do they
47:46and yet surprisingly often so I think
47:51the answer is you just listen to the
47:52decisions they've made so far in
47:54building the business and if you're like
47:55that's not a decision I think is okay
47:57you can expect more of them in the
47:58future but just listen in the first few
48:01meetings and you'll be surprised
48:02we definitely have been fooled by plenty
48:04of people but we also make our decisions
48:15results-based observations about when to
48:18exercise parada and when not to
48:20several venture firms have done very
48:23sophisticated studies of this and they
48:25have all come to the following
48:26conclusion which is if the company is
48:30raising an up round led by a good VC say
48:33a top quartile VC you should always
48:36exercise pro rata and if you do that
48:39across their whole portfolio you'll be
48:42happy now this could change if the world
48:44really changes and but in the world
48:47today there's like very clear data on
48:48this what's pirata so often when you
48:52invest in a company you will get not
48:54always but often you will get something
48:56called a pro rata right which is your
48:58right in future rounds to invest enough
49:01dollars in the new round to maintain
49:02your ownership level sure
49:32all right do I think security tokens and
49:34icos will change financings probably but
49:42not in the way that most people think I
49:43think this idea that like everyone is
49:46going to just raise money from the crowd
49:48I like I think we'll find out that we
49:51have securities laws for a reason and
49:52that we want some level of that and that
49:56the level of you know I think like there
49:59are some incredibly important ICO is
50:01happening right now but they are dwarfed
50:03by the number of sort of things that are
50:05between just incompetence and scams
50:08however I do think that it's possible
50:11that we just find a much better
50:12mechanical way to track the investments
50:15we do right now so that's possible a bad
50:18idea that seemed sorry a good idea that
50:21seemed like a bad idea you know this is
50:26like one of our darlings but I just like
50:27it's a it's an example that sticks with
50:29me so much because they were in my own
50:31YC class in 2005 was reddit so when
50:35reddit started I remember very clearly
50:37like telling my friends about it because
50:40I was like oh there's this site and you
50:41know you can like find these links and
50:43and and I remember people looking at me
50:45like and they were good well-meaning
50:47people nice people that is the dumbest
50:50thing I've ever heard like there's all
50:53these things already on the Internet
50:55you know this one is just like pictures
50:56of cats or whatever it was at the time
50:59and the in it and there's no way you
51:03will ever make money on this business so
51:06that's like there's other more famous
51:08examples but that is the one that for me
51:10resonates very deeply because I was I
51:15heard so directly from people I trusted
51:17so much and I remember like when they
51:19would say it I would just be like oh
51:20yeah I guess it's not a very good idea
51:22like I had all this conviction that
51:24totally went away when people I trusted
51:26said said said something was bad there's
51:31another common version of
51:34this problem which is where there's an
51:36idea that seems good in the abstract but
51:39everyone assumes the big companies will
51:42so Dropbox is an example of this where
51:45when when we funded them and when they
51:47were kind of getting going everyone was
51:48like oh it's a perfectly nice product
51:50but you know Google Microsoft whatever
51:53guaranteed to crush them soon all right
52:12um you know when uber was getting going
52:17there were there would be all of these
52:18articles that would come out it felt
52:19like every year where someone would say
52:21uber is not worth X the entire taxi
52:23market is only worth you know 10% of X
52:26and so and this just this kept going um
52:29and that is really hard right because
52:31you don't you don't have a sense for
52:35exactly how big the market is because
52:37growing so quickly I think one thing you
52:39can do is look at like shifts in
52:41consumer behavior that are creating new
52:43markets so like if you thought of uber
52:47as a replacement for booking limo
52:49services that was one thing if you then
52:52started to realize that people had begun
52:54to use it as a replacement for taxis and
52:57then public transit and then car
52:58ownership you could project forward Wow
53:00this market is actually going to be
53:02quite big because all of this other
53:04consumer behavior is going to shift here
53:26um all right a solo non-technical
53:30founder I wouldn't say I never would
53:34I think it can work I do like it when
53:36that founder learns enough to build an
53:40MVP where I've seen that go wrong the
53:43most often is then the ability to
53:46attract evaluate and retain technical
53:48talent and so we have a strong strong
53:53preference for founding teams that have
53:56at least one technical founder we also
53:58have a strong preference for teams that
54:01have at least two co-founders again none
54:03of these are absolutes because this is
54:05all about the power law we are always
54:07willing to consider exceptions so I
54:09would never answer a question like that
54:10and sad would never but I would try to
54:12be clear like here's what I've seen work
54:14more often what is the next question
54:16Oh a good amount of self-awareness um I
54:26think I think a good amount of like
54:29willingness to take a feedback and a
54:32drive and a desire to improve is really
54:34important but you know you you do also
54:39have to sort of believe that you can
54:41succeed in spite of all of your flaws
54:42and and so that that's almost more
54:46important to me than like someone who
54:48really spends a lot of time categorizing
54:50everything about it if they're willing
54:52to listen willing to improve I've
54:54usually found I can work with that
54:55founder one more question in the back
55:04how do you think about evaluating your
55:06time and resources to different founders
55:08a self-indulgent way to do this but one
55:12that works is only fund founders that
55:15you want to allocate a lot of time to
55:17because if you don't and if you're like
55:19if the founder is like difficult to work
55:21with or doesn't listen or you're just
55:24not excited about the business a that's
55:26probably a red flag for their qualities
55:28as a founder and be you then you won't
55:31spend time and you won't help them and
55:32you won't get this differentiated things
55:33so I like I won't fund a founder that I
55:40don't want to spend a lot of time
55:41helping and as that has always worked
55:43pretty well for me all right thank you
55:46all very much so just just a couple of
55:56quick notes Sam mentioned that you want
56:01to look for founders who understand that
56:05startup success can take as long as a
56:07decade or more I think it should be
56:09obvious that the same thing is true for
56:11for you all investing investing is not
56:14again investing startups I should say is
56:16not a get-rich-quick scheme it requires
56:21both patience and passion the the the
56:25interest that that that is hopefully
56:28reciprocated by the founder and the
56:30second thing I will point out as someone
56:33who has done a lot of angel investing
56:35and compares his results to sands that
56:37he's really really good at it
56:39so I hope you do listen quite carefully
56:43or have listened quite carefully to what
56:45we are going to take a short break so
56:49please try to be back here by 11:15 10
56:53minutes and then Christine Carolyn are
56:57going to talk about investing
56:58fundamentals and mechanics thank you
59:13thank you and can we also just check the
59:25yeah I'm gonna turn up right now Hey
59:35oh you're doing a livestream yeah so
59:50you're our engine and then we're just
59:53gonna have to jostle for position on
01:01:21cuz I I'll let him know
01:01:24hello hey hello everybody
01:01:36quick announcement in the spirit of
01:01:41having kinks apparently we have a couple
01:01:43of overflowing toilets the one in the
01:01:46back is not working the one here is
01:01:48working if there is too long a line you
01:01:51may go across the street it's a 335 if
01:01:55you go right to the left when you go in
01:01:57there are toilets please feel free
01:07:14hello hello hello everybody please come
01:07:19take your seats we're gonna get started
01:07:20right away please thank you hello
01:07:36yes and they're not too particular about
01:08:12okay so first announcement is that
01:08:17apparently our toilets are closed here
01:08:18there's a there's a city problem but it
01:08:23stops here so you if you need to use the
01:08:26restroom please go across the street to
01:08:283:35 give it one sec for people to come
01:08:36in all right this next session is
01:08:40actually one of my very favorites
01:08:42because there's so much mystery in the
01:08:45fundamentals of how you actually do a
01:08:48startup investment what it really means
01:08:50and how it works and there are no two
01:08:52people who are greater experts in that
01:08:54on the planet than my colleagues carolyn
01:08:57levy and christina who who who who have
01:09:01dealt with these issues with I guess
01:09:05thousands of companies now it's
01:09:08certainly all sixteen or seventeen
01:09:10hundred YC we should what is the actual
01:09:13number probably no nobody knows it
01:09:17hundreds of companies they know this
01:09:19stuff better than anyone
01:09:20Carolyn is the is the person who
01:09:25actually invented the safe
01:09:27she used to be attorney it it it will
01:09:29see any before coming here and Kirsty is
01:09:31the CFO of YC they too have have a
01:09:36couple of pithy quotes you can guess who
01:09:40said what because I don't know one said
01:09:43all investors who can help should do so
01:09:48asking for additional shares is just
01:09:51asking for a freebie I'm guessing that's
01:09:53Kirsty but I'm not sure
01:09:58having money is very valuable but
01:10:02someone who helps with strategy and
01:10:04direction is priceless so choose wisely
01:10:07so with that I will give you Carolyn
01:10:18this is working okay
01:10:21yeah I have no idea which quote is mine
01:10:23and which one is Kirsty's and we were
01:10:25going to introduce ourselves but since
01:10:26Jeff just did it we will move right
01:10:29along like Jeff said this is the
01:10:31mechanical part okay this presentation
01:10:36is about how to invest using Y
01:10:38Combinator's is my mic not on did people
01:10:42nine lights on just on low better better
01:10:51better better okay I think we're good
01:10:57so as I was saying this presentation is
01:10:58about how to invest using Y Combinator's
01:11:01safe which is the first thing I'm going
01:11:03to talk about and then Kirsty's gonna
01:11:05describe how the safe converts in an
01:11:08equity financing I'm gonna talk about
01:11:11how the safe converts in other events
01:11:14quick word about process and then we had
01:11:16some advice that Sam kind of covered but
01:11:19will Tucker will just reiterate it
01:11:20because it's important okay so a lot of
01:11:25you raised your hand when Jeff asked or
01:11:27Sam asked how many people have already
01:11:28angel invested so I'm wondering how many
01:11:31of you have already used the safe - oh
01:11:34that's a lot okay okay so um I'm gonna
01:11:38talk about the basics for some of you
01:11:39that's gonna be stuff you already know
01:11:41but for those of you who've never used
01:11:42it hopefully that will be helpful it
01:11:44will be helpful okay um we drafted the
01:11:51safe for very early stage startups so
01:11:54that means that the company maybe hasn't
01:11:56written or definitely hasn't raised a
01:11:57price round doesn't have any preferred
01:12:00stock outstanding you absolutely can use
01:12:04the safe for companies that are later
01:12:05stage that have already raised a priced
01:12:07round and issued preferred stock in fact
01:12:09some of you may have already done that
01:12:10but we intended it for very early-stage
01:12:14startups a time when you may not want to
01:12:17use the safe as if you are looking at a
01:12:19company that has already issued
01:12:22convertible promissory notes to earlier
01:12:24investors and if that's the case you're
01:12:27gonna want to go ahead and just use that
01:12:28same note not use the safe and that's
01:12:30because it's a lot less complicated for
01:12:32a company to have all of its investors
01:12:35on the same document and it's also more
01:12:37fair to have all the investors on the
01:12:39same footing so obviously if you find a
01:12:43company you want to invest in and they
01:12:44are actually doing a priced round you're
01:12:46going to invest in that price round and
01:12:48buy preferred stock but for the vast
01:12:50majority of early-stage startup they
01:12:53don't have a lead investor they don't
01:12:55have a person setting the terms setting
01:12:58the price of the round and most the time
01:13:00for very early-stage startups they don't
01:13:02even know what they're doing yet and
01:13:04that's where the safe comes in because
01:13:06for these very very early-stage
01:13:08companies they just want to raise a
01:13:10little bit of money from their friends
01:13:12and from family and from angels and with
01:13:15the safe they can do that very
01:13:17efficiently very quickly and very
01:13:20cheaply because neither the investors
01:13:22nor the company need to get legal
01:13:24counsel okay the safe is an acronym
01:13:30stands for a simple agreement for future
01:13:32equity as I said before it is a
01:13:35convertible security it converts into
01:13:39shares of the company's stock the
01:13:41premise is very simple you the investor
01:13:44give money to the startup right now and
01:13:46at some point in the future you're going
01:13:47to get your stock one of the most
01:13:50important things I say this a lot the
01:13:52safe is not alone
01:13:54it is not debt it does not accrue
01:13:57interest there is no right to be repaid
01:14:00at some point in the future at some
01:14:02maturity date so please don't call it a
01:14:04safe note that makes me really crabby
01:14:08okay what does it look like I brought
01:14:11one it's it's five pages long
01:14:15compare that to a set of financing
01:14:16documents which is about five documents
01:14:19and none of them are five pages long
01:14:20they're all much longer there are only
01:14:23two key terms I'm going to show you
01:14:24this is what the intro paragraph of the
01:14:26safe looks like you can see that there
01:14:29are two blank spaces there the first one
01:14:33is the amount of money that you're going
01:14:35to invest in the startup and the second
01:14:37one is the valuation cap Kirstie's going
01:14:41to get into detail about what the
01:14:42valuation cap is when she speaks next
01:14:45but those are the only two things that
01:14:47you negotiate with the company it is
01:14:48just that simple after the intro
01:14:53paragraph there is a whole section that
01:14:54describes the conversion events which we
01:14:56will get into in a minute there is a
01:14:59section of definitions because it's a
01:15:01legal document we always have to have
01:15:02definitions and then the rest of it is
01:15:04boilerplate and an example a boilerplate
01:15:06company makes reps and warranties to you
01:15:09about the status of the company you make
01:15:11some representations to the company
01:15:13about being an accredited investor and
01:15:15then there's a really skinny
01:15:17miscellaneous section at the end I want
01:15:21to point out what is not in the safe for
01:15:23those of you who own preferred stock
01:15:25have made an investment and company and
01:15:27gotten preferred stock you will know
01:15:28about voting rights and information
01:15:31rights and liquidation rights those are
01:15:33not in the safe because the safe is not
01:15:35yet stock when you're safe converts and
01:15:37you get preferred stock you will be
01:15:39piggybacking on all those same rights
01:15:41that the lead investor in the round has
01:15:43negotiated for the preferred stock so
01:15:45you won't find those things in the safe
01:15:47so um what you will find in the safe is
01:15:50pro rata and Sam conveniently defined
01:15:52that for some of you who don't know who
01:15:54didn't know what it was before it's the
01:15:55right to buy more stock in future round
01:15:57so that you maintain your percentage
01:16:00ownership of the company the safe has a
01:16:02section that says that you will get
01:16:04those pro-rata rights in the next round
01:16:06not the conversion round but the next
01:16:08round so if you're safe converts in a
01:16:10series a preferred stock financing that
01:16:13document will bake in the right for you
01:16:15to buy shares of this series B financing
01:16:18so that you can maintain your pro rata
01:16:26okay so um what we are what I've been
01:16:31talking about is what we call the capped
01:16:33a f--- it's the one that has the target
01:16:35valuation Kirstie's gonna describe that
01:16:37in a lot more detail it's the most
01:16:38commonly used safe that we have but
01:16:42there are a couple of other versions of
01:16:44the safe that I'll go over briefly there
01:16:46is something called a discount safe
01:16:48instead of negotiating that valuation
01:16:51cap in the intro paragraph you and the
01:16:53company will negotiate a discount rate
01:16:55and the discount rate will then apply to
01:16:57the shares when you convert the safe
01:17:00typical discount rate ranges in between
01:17:03ten and twenty percent so for example if
01:17:07this series a round that your safe is
01:17:09converting in is the lead investor has
01:17:10priced it at $1 per share and you've
01:17:12negotiated a 20 percent discount your
01:17:14effective price is 80 cents share it's
01:17:18there's also an uncapped safe which not
01:17:23as not not very common to use this has
01:17:26neither a target valuation nor a
01:17:28discount so really you're just
01:17:29converting your safe into the same price
01:17:31that the series a is paying there's no
01:17:33reward for being the early money that's
01:17:35why it's a pretty unusual safe to have
01:17:37but occasionally a company has such
01:17:39great demand that they can get away with
01:17:42serving up an uncapped safe so just be
01:17:44on the lookout for that
01:17:45and then a third version is what we
01:17:49called the MF n safe MF n stands for
01:17:52most favored nation it's a it's a
01:17:54concept we borrowed from contract law
01:17:56and there is no target valuation in this
01:17:59safe but there's this MF n paragraph
01:18:01that says that if a subsequent investor
01:18:04negotiates a target cap or rather target
01:18:08valuation or a discount you get to amend
01:18:10your safe to take the terms that that
01:18:12investor got so that so then your safe
01:18:14is no longer uncapped and now Chris
01:18:23all right so now we're going to talk
01:18:26about how the safe converts and we'll
01:18:28cover how the valuation cap works the
01:18:31maths behind the safe converting so this
01:18:33is going to turn into a maths class and
01:18:36also how to understand your ownership so
01:18:40first of all the valuation cap this is
01:18:42one of the things that as Carolyn
01:18:44mentioned is one of the things that you
01:18:46will negotiate with the founders and
01:18:49you'll also hear it referred to not only
01:18:51as a valuation cap but a target
01:18:53valuation or just simply a cap and the
01:18:57caps the highest valuation that your
01:18:59safe will convert at so if the priced
01:19:02round is lower than the valuation cap in
01:19:06your safe will convert into shares at
01:19:08that priced round valuation and it's
01:19:11important to note that people get really
01:19:13confused with the cap they think it's a
01:19:15current valuation of the company that's
01:19:17really not what it is all it is is a way
01:19:20for you to be rewarded for coming in at
01:19:23the earlier stage when in theory you're
01:19:25investing at a riskier stage it's it's
01:19:28the way to for you to get your rewards
01:19:31and your bonus and so ideally what you
01:19:33really should be thinking is if I'm
01:19:35putting money in at this cap then what
01:19:37do I think the series a price how much
01:19:40higher do I think the next price rounds
01:19:42price is going to be and ideally you
01:19:45want that high because then your reward
01:19:47is better okay so your safe will convert
01:19:54into shares when the company completes
01:19:55and equity financing i priced round and
01:19:59different companies depending on the
01:20:02stage of the company that priced round
01:20:04might be called the series seed it might
01:20:06be a Series A or there might be some
01:20:08situations where they've already raised
01:20:10the series a and there's some safes
01:20:11bridging them to the series B so it's
01:20:14just whatever the next price round is
01:20:16and we'll try to refer to it just as a
01:20:19priced around here but sometimes it just
01:20:20slips in this it's a Series A but it can
01:20:22be any price trend and in that equity
01:20:27financing the company the founders will
01:20:30negotiate with a lead investor in that
01:20:33round and will create a term sheet
01:20:35that sets out the terms of that rant and
01:20:39those terms don't impact how your safe
01:20:42converts because that sets out in the
01:20:45safe itself but what it does impact is
01:20:48how many shares the safe converts into
01:20:50as we'll go over in a moment so when the
01:20:55priced round closes three things happen
01:20:58and in the documents they're all
01:21:00happening at the same time but in the
01:21:03calculations they actually go in order
01:21:05and you'll see why in a moment
01:21:06so first of all an options pool is
01:21:10created or increased if the company
01:21:12already has one and usually the closing
01:21:16option pool which is negotiated as part
01:21:18of the term sheets negotiations it
01:21:20usually is around 10% of the post round
01:21:26shares and that's kind of what makes
01:21:29this calculation a little bit
01:21:30complicated as we'll see in a moment
01:21:32next thing is that the safes convert
01:21:35into shares and although the safes
01:21:38themselves don't state this the term
01:21:41sheet will usually specify that the SIRT
01:21:44the safes convert in the pre-money and
01:21:47what that basically means is that this
01:21:50the shares that the safes have converted
01:21:52into are considered when the price per
01:21:56share for the lead investor is being
01:21:58calculated and again you'll see that in
01:22:00an example in a moment and then thirdly
01:22:03the new money comes in so the lead
01:22:06investor and anybody else who's
01:22:07investing in the round at that time will
01:22:09invest their money and buy their shares
01:22:13okay here comes the mass so it's a very
01:22:21high level for any investor the number
01:22:24of shares that an investor will receive
01:22:25is the investment amount divided by a
01:22:29price per share and the price per share
01:22:31is calculated by dividing evaluation by
01:22:35the shares issued by the company and the
01:22:38shares issued by the company is
01:22:40otherwise often or always referred to in
01:22:42the documents as the capitalization of
01:22:45the company and so for a safe holder the
01:22:50the cap and the capitalization is
01:22:52usually the issued shares plus the
01:22:54increased options pool for the new
01:22:57investor the valuation is the priced
01:23:00round valuation and the capitalization
01:23:02is the issued shares the increase in the
01:23:05options pool and the shares that the
01:23:07safes have converted into alright here's
01:23:12an example so on the left over here we
01:23:16have an example situations so we have
01:23:18founders who have nine million shares
01:23:21issued and there's three founders in
01:23:24this example and they're all sharing the
01:23:25shares equally and at demo day in March
01:23:28the company raises $800,000 on safes and
01:23:33they all have the same valuation cap
01:23:35they all have an eight million dollar
01:23:36cap then fast forward to November 2019
01:23:42and it can take that long maybe even
01:23:44longer before a priced round happens and
01:23:46they raise a priced round which is where
01:23:50they raise four million dollars at a 16
01:23:52million dollar pre-money valuation and
01:23:56the terms that are negotiated in the
01:23:59term sheet as well are that the options
01:24:01pool will be increased to ten percent of
01:24:03the post money and the safes convert in
01:24:06the pre money and I'm not going to get
01:24:09into the calculation of how the option
01:24:11to pool increase number works because it
01:24:14gets very circular as I'll show you in a
01:24:16moment but just trust me that it's going
01:24:19to increase to this very not round
01:24:22number of just over one point four
01:24:23million shares okay those are the
01:24:27details so the first thing that happens
01:24:30we've increased our options pool the
01:24:33next thing that happens is that our
01:24:34safes convert so the safe capitalization
01:24:38as defined in the safe is the issued
01:24:41shares plus the increase in the options
01:24:43pool so ten point four ten point four
01:24:46three million shares the safe conversion
01:24:50price is the valuation cap because the
01:24:53cap is less than the priced round
01:24:55divided by that capitalization to give a
01:24:58conversion price of seventy seven cents
01:25:03as the safe investor buys our the
01:25:07$800,000 investments divided by this
01:25:10conversion price to give us just over 1
01:25:14million shares everybody with me still
01:25:18ok good so then the next thing that
01:25:24happens is our new money calculation
01:25:27happens so this is the lead investor in
01:25:29the price round so this time the
01:25:32capitalisation doesn't include just the
01:25:34issued shares and the increase in the
01:25:36options pool it also includes the shares
01:25:39that the safes have converted into so
01:25:41this time we have a capitalization of 11
01:25:44point 4 million shares and then the
01:25:48price per share is calculated again
01:25:51using the price per share
01:25:53sorry their valuation from the term
01:25:55sheet the 16 million divided by the
01:25:58eleven point four seven million shares
01:26:00to give a price per share of 139 and so
01:26:05those that four million dollars from the
01:26:07new money investors will buy two point
01:26:11eight seven million shares
01:26:18okay so bringing this all together this
01:26:21is a very simple cap table it's much
01:26:24prettier than cap tables normally look
01:26:26so for those of you that are not
01:26:29familiar with cap tables how this works
01:26:31is it's just a way of explaining the
01:26:35ownership of the company and who owns
01:26:37what and in what proportions so here you
01:26:41can see that we have our three founders
01:26:43they own common shares their numbers
01:26:45haven't changed the number of shares
01:26:47that they have stays the same we have
01:26:50our increased options pool this is where
01:26:53the employees will be issued shares from
01:26:56in the future and then we have our safe
01:26:59investor who has their 1 million approx
01:27:03shares and you have the price ground
01:27:05investor who has the 2.8 million shares
01:27:08and these safe investor and priced
01:27:11investor has preferred shares founders
01:27:14and employees have
01:27:16common shares so what you can see from
01:27:21here is that even though the safe
01:27:24investor has put in eight hundred
01:27:27thousand dollars of the total four point
01:27:30eight million that the company raised
01:27:32proportionally between these two
01:27:34investors they actually have a much
01:27:36higher number of shares and that's
01:27:38that's the cap coming into play and
01:27:41that's how the safe investor gets the
01:27:43reward for their early investing so
01:27:46that's how that works it's also shows
01:27:50percentage ownership and you can see
01:27:52that my maths did work our options pool
01:27:55is 10% of the total post post money
01:28:00shares which is the total of these two
01:28:02numbers now safe investors have quite a
01:28:08hard time of it because at the time that
01:28:11you actually sign your safe you don't
01:28:15really know how much ownership you're
01:28:17going to wind up with after the priced
01:28:19round and the reason for that is that
01:28:22even though the safe says how the safes
01:28:24going to convert it doesn't specify how
01:28:27many shares it's going to convert into
01:28:29because that is dependent on the terms
01:28:32of the priced round and so in this
01:28:34example the safe investor has just over
01:28:37seven percent of the shares and the way
01:28:42you can think about it when you're
01:28:43signing you safe if you're thinking
01:28:45about ownership it's kind of a rule of
01:28:46thumb of $800,000 invested at an 8
01:28:51million cap gives an eight point eight
01:28:55million post-money valuation of the
01:28:58so the safe investor would own
01:28:59approximately nine percent of that but
01:29:03that assumes that the safes convert
01:29:04immediately on signing and there's no
01:29:06money there's no new money and that's
01:29:08actually never happens so the reason why
01:29:13this 7 percent is not nine percent is
01:29:16why it's less is because the safes have
01:29:19been diluted by the new money coming in
01:29:22and just as an example to just explain a
01:29:28little bit more if the
01:29:30of the priced rounds had all been
01:29:32exactly the same except that the
01:29:35investor had only put in two million
01:29:37dollars instead of four million dollars
01:29:39then the ownership here would be just
01:29:42over eight percent so that just tells
01:29:45you exactly you know you you really
01:29:46can't tell how much you're going to get
01:29:49until the price trend because that's
01:29:57quite difficult it's important to do
01:29:59your own modeling and to think about how
01:30:01you you know what scenarios could happen
01:30:04to explain your ownership going forward
01:30:07and so there's a couple of things that
01:30:09we can that we have shared with you to
01:30:12Jeff wherever he's gone has written some
01:30:15software called angel calc and that is
01:30:18modeling software that allows you to see
01:30:20various different scenarios and there's
01:30:23also going to be a spreadsheet that I'm
01:30:25going to put on to the resources page at
01:30:27the investor school website so that you
01:30:30can see you can play around with the
01:30:31calculations and you can see how safes
01:30:35might convert in the future okay
01:30:48okay so suppose you've invested in a
01:30:52company and before it raises a price to
01:30:56round something else happens and
01:30:58examples of what else could happen is
01:31:01that it could get acquired it could fail
01:31:03or nothing could happen so I'm going to
01:31:06talk about those okay I think it's
01:31:11easiest to understand what happens in
01:31:13the safe in a merger acquisition
01:31:14situation if you look at both extreme
01:31:17ends of the spectrum the first one
01:31:22extreme end would be you know a home run
01:31:24situation and buy home run effect I
01:31:26think Sam mentioned this as well this
01:31:28term this is where an acquiring company
01:31:30is coming in and paying a lot of money
01:31:32for the startup you invested in so what
01:31:36happens to the safe well you are going
01:31:38to convert it into shares of common
01:31:40stock your gonna do that by using the
01:31:43target valuation to determine the number
01:31:45of shares of common stock you get and
01:31:47then you are gonna participate in the
01:31:49proceeds of that merger along with the
01:31:51founders and the other common
01:31:53stockholders in that case you can expect
01:31:55a return that is well in excess of what
01:31:58you paid for your safe this is also what
01:32:01would happen in an IPO by the way so
01:32:02same same situation same result rather
01:32:06okay other end of the spectrum is the
01:32:08aqua hire and I don't know if this is a
01:32:10term that all of you in the room are
01:32:11familiar with but this is a situation
01:32:13where an acquiring company is coming in
01:32:16and just taking the talent out of the
01:32:18startup that you invested in so the you
01:32:20know founders and key employees they are
01:32:22not paying money for the intellectual
01:32:24property or any other assets and these
01:32:26are deals where there is usually very
01:32:28little money in that situation you are
01:32:31going to elect to have your safe paid
01:32:34off so the safe gives you the option and
01:32:41because you know most deals aren't at
01:32:44these two extremes of the spectrum
01:32:45they're somewhere in the middle what you
01:32:47need to do when you're confronted with
01:32:48this situation is actually do the math
01:32:51and figure out how you get the best
01:32:53result whether it's converting into
01:32:54shares of common stock and taking in
01:32:56merger proceeds or just getting paid
01:33:02okay so sometimes a company raises money
01:33:07from you and other angel investors and
01:33:10just can't make it work
01:33:13hopefully they try really hard but
01:33:15sometimes it just doesn't happen and
01:33:16they fail and when failure happens
01:33:19companies need to go through an actual
01:33:21dissolution process and part of the
01:33:24process requires that creditors be
01:33:26repaid in in a dissolution situation
01:33:30they need to pay off their trade debt
01:33:31which is vendors and landlords and they
01:33:33obviously have to have to have to pay
01:33:35their salary any employees they have to
01:33:37have need to pay the salaries if there
01:33:40is any money left over the safe says
01:33:43that you are next in line so if there's
01:33:45money the safe holders and any other
01:33:47investors will get paid back often it's
01:33:49pennies on the dollar but they get
01:33:51something before stockholders get
01:33:54anything and honestly in a dissolution
01:33:55situation not only is there never any
01:33:57money for stockholders but there's
01:33:58rarely enough to pay back investors
01:34:00either this is usually just a total
01:34:02failure and you know you can expect this
01:34:04to happen some of the time what happens
01:34:09if nothing happens so this would be a
01:34:13situation where the company has raised
01:34:15angel and you know raised from angels
01:34:17and actually become self-sustaining you
01:34:21know profitable and they just putter
01:34:24along and suddenly they have no desire
01:34:26to raise a priced round and nobody's
01:34:28knocking at their door to acquire them
01:34:30so what happens well the safe doesn't
01:34:35address this and there's a reason why
01:34:36the safe doesn't address this situation
01:34:38number one when you try to draft for all
01:34:41these corner cases it stops being a
01:34:43simple document and becomes a very
01:34:45complicated document in a very long
01:34:47document and number two this just
01:34:50doesn't happen very often this is in
01:34:51high-growth world this is extremely rare
01:34:55but if you want to fund lifestyle
01:35:00companies you definitely do not want to
01:35:02use the safe because then you're going
01:35:04to have this problem all the time if you
01:35:06have accidentally funded a lifestyle
01:35:08company then I think our advice would be
01:35:12you go talk to the founders about it
01:35:14because hopefully you invested in really
01:35:16good people and they would want to do
01:35:18right by you and figure out how to make
01:35:20you whole that kind of goes back to
01:35:22Sam's point about being really careful
01:35:23about the founders you choose to put
01:35:25your money into Oh Curtis is going to
01:35:30talk about process okay so we've talked
01:35:37about what safes are and how they
01:35:38convert but now let's talk about the
01:35:40process for actually signing the safe
01:35:42and then also for converting it into the
01:35:45shares so the first thing in this
01:35:48process is the handshake protocol and
01:35:52the reason why we created this is to
01:35:55help to avoid misunderstandings founders
01:35:58are by nature very optimistic and we've
01:36:01seen many situations where the investors
01:36:05said something like yeah I'm interested
01:36:08meaning I'm interested in finding out
01:36:10more about the company and the founder
01:36:13hears this as I'm going to invest in
01:36:15your company q lots of misunderstandings
01:36:18and confusion so the handshake protocol
01:36:22is just simply a set of emails that sets
01:36:26out in writing the key terms and make
01:36:28sure that everybody is in agreement so
01:36:31the founder sends an email to the
01:36:33investor and says just confirming that
01:36:36you're in for X dollars at Y cap and
01:36:40then you reply to the email to confirm
01:36:42and at this point there's a handshake
01:36:45deal and it's considered bad practice at
01:36:48this point to back out and again
01:36:51reputation is everything in this world
01:36:53so you know you don't want to be doing
01:36:56things like backing out because it can
01:36:57harm your reputation and on the flip
01:36:59side the founders are under no
01:37:02obligation to take your money until that
01:37:05handshake deal is completed so
01:37:07especially in a hot deal where there's
01:37:09loads of people trying to get in you
01:37:11want to run through the handshake deal
01:37:12process so that you know that you're
01:37:14actually going to be able to get into
01:37:15the round and you can read more on this
01:37:20on our website as well there's a
01:37:23slightly more detailed blog post about
01:37:24it but those are there those are the
01:37:26points most YC founders will use Clerke
01:37:33to send and sign safes and this is an
01:37:36online platform that uses the standard
01:37:39YC safe in a template form and then the
01:37:42founders add the specific details for
01:37:44your investment into that template and
01:37:47you'll you'll receive a signature
01:37:49request through Clerke where you can
01:37:51review the details either in summary
01:37:53form or the full safe itself and you can
01:37:58assign the documents so you don't need
01:38:01to do it all in person
01:38:02the founders will also include wire
01:38:04details at that point so you have those
01:38:07handy as soon as you've signed sometimes
01:38:10the founders might use other platforms
01:38:12and especially non YC founders there's
01:38:15lots of options out there hello sign is
01:38:18another assigning platform similar to
01:38:21DocuSign or simply they might just
01:38:24download them from our website which is
01:38:26this link and send them to you in an
01:38:29email to sign and send that way all of
01:38:32those work is just preference so when
01:38:38you receive a signature request through
01:38:41Clerke or whatever other means you
01:38:43should check the details in there are
01:38:45what you previously agreed to in
01:38:48addition you should check that the name
01:38:50and signature block on the safe is
01:38:53correct particularly if you're investing
01:38:56through a trust or through a fund or
01:38:58you've created an LLC the founders won't
01:39:01always know the legal name if you
01:39:02haven't set that out specifically for
01:39:04them so you should make sure that those
01:39:06details are correct before you sign the
01:39:09safe don't sign the safe and then tell
01:39:12the founders it needs changing and you
01:39:15should be ready to wire the money as
01:39:18soon as you sign the safe the safe isn't
01:39:21valid until the money is wired and one
01:39:25of the things that when we ask founders
01:39:28what makes a good investor one of the
01:39:30things that comes up a lot is that the
01:39:32investors sign and wire the money
01:39:35quickly you know it's important to the
01:39:39raise their money and get back to work
01:39:42and so fun so investors that delay the
01:39:45process or that say that they want to
01:39:47invest and then say to the founders oh
01:39:49but hang on because I just need to close
01:39:51my fund or I'm just this companies
01:39:53nearly exited and I'm just waiting for
01:39:55the transaction to happen so I can get
01:39:57some money really if those if that's the
01:40:00situation you should probably not be
01:40:02talking to invite two founders about
01:40:04investing in their company until you
01:40:06actually have that money available now
01:40:16when your safes convert in the price
01:40:18trend you'll be asked to sign more
01:40:20documents and these documents will be
01:40:22the same documents that the lead
01:40:24investor has signed and will have be
01:40:26negotiated by the lead investors and
01:40:27their legal team and the company's legal
01:40:29team and you'll you'll receive an email
01:40:32from either the founders or their
01:40:34lawyers asking you to sign some
01:40:37documents you may at this point need to
01:40:40ask them to send you the conversion
01:40:43calculations otherwise known as a pro
01:40:46forma cap table so that you can actually
01:40:49confirm how many shares your safes are
01:40:51converting into and see your post money
01:40:54ownership and you should definitely make
01:40:57sure to review that the the cap tables
01:41:00that we see and we've now seen thousands
01:41:03of cap tables it's surprising how many
01:41:06times the lawyers actually get the
01:41:07conversions wrong so I really strongly
01:41:09recommend that you do review those cap
01:41:12tables and you make sure that you are
01:41:13happy with the calculations for how your
01:41:15safes convert and now sadly you might
01:41:19not actually have much time to review
01:41:21these documents and to review the cap
01:41:23table you know the founders will be
01:41:26focusing on the lead investor they'll be
01:41:27negotiating with the lead investor and
01:41:29they'll have set a closing date and then
01:41:32they'll suddenly send you an e-mail out
01:41:34of the blue saying we need to close
01:41:36tomorrow here are the documents you have
01:41:38to sign and you know yes you want to be
01:41:41a good citizen and you don't want to
01:41:43hold up the closing but also you know
01:41:45this is this is your investment and you
01:41:48need to make sure that you're happy and
01:41:49that you've reviewed the documents and
01:41:52you know accept the terms in there so
01:41:55don't don't sign until you are happy
01:41:58with those documents all right okay so
01:42:07as I mentioned Sam kind of already said
01:42:12some of the stuff hmm
01:42:14but I'll just reiterate because these
01:42:16are really important points the first
01:42:19piece of advice and this is what we
01:42:21meant about think about the outs upside
01:42:23this is this is just Sam's power-law
01:42:25point if you believe in the power law
01:42:29and you invest that way you mean then
01:42:32what you're not gonna do is waste time
01:42:34negotiating downside protection because
01:42:37what you've realized is that eking out a
01:42:39one and a half x return on all these
01:42:42little investments is not worth it when
01:42:44you're have the mindset that you're
01:42:46funding the next Google and that's gonna
01:42:48be your you know 100x return the next
01:42:51point you wanted to make is be helpful
01:42:53and Sam also touched on this a lot be
01:42:57helpful when the founders ask sometimes
01:43:01angels write checks and they completely
01:43:03disappear and sometimes angels write
01:43:06really really small checks and then they
01:43:07pester the heck out of founders forever
01:43:09don't do that figure out be the kind of
01:43:12angel that just gives the right amount
01:43:14of help sometimes angels think that they
01:43:17need to ask to be on the board of
01:43:19directors in order to be officially
01:43:20helpful and you don't and please don't
01:43:22because it's actually not something the
01:43:25founders probably want sometimes I mean
01:43:27there's exceptions but usually they
01:43:28don't want early investors on their
01:43:31board of directors and lastly tolerate
01:43:34failure I think that all the other
01:43:37speakers in this course are going to
01:43:38talk about this a lot I think it's
01:43:42really easy to get buyer's remorse when
01:43:44a company really starts to struggle and
01:43:47I think that gets even worse when the
01:43:49founders decide to pivot but you should
01:43:52expect and prepare for pivots and
01:43:54remember the safe is not alone you can't
01:43:56go running in there and ask for your
01:43:58money back just because the founders
01:43:59start doing something different you need
01:44:01to tolerant you need to tolerate that
01:44:03and you need to be supportive and you
01:44:04need to give the founder as a chance
01:44:09okay so in conclusion we have covered
01:44:13quite a lot here and safes although on
01:44:16first glance look simple can get quite
01:44:18complex so if there's anything to take
01:44:22away from this these are the key points
01:44:24so use the safe to invest it's the
01:44:27fastest and easiest method understand
01:44:30your rights as a safe holder and at the
01:44:32point of conversion I cannot stress this
01:44:36enough but understand your ownership and
01:44:38understand where that comes from
01:44:39and finally be patient you know this is
01:44:43this is a long game you're going to be
01:44:45with the company through highs and lows
01:44:46and you know you need to you need to see
01:44:49it out so good luck to you all I hope
01:44:53you all make lots of great investments
01:44:56and I think we have some time for some
01:44:59questions you want us to take questions
01:45:35so the the the question is how do you
01:45:40make sure that you are fully rewarded is
01:45:42that what you were saying okay so so and
01:45:49the vulnerability of the cap to the
01:45:51subsequent money so you know the numbers
01:45:53we're talking about here are an eight
01:45:56million dollar cap and a sixteen million
01:45:57dollar series a pre-money valuation if
01:46:00you're invested in the next Google
01:46:04you're going to exit at thirty billion
01:46:08dollars or whatever the number is so
01:46:10whether your cap is eight million and
01:46:13the Series A is 16 million or whether
01:46:15your cap is 10 million and the Series A
01:46:17is 14 million there is still a huge
01:46:20amount of upside there so and that's and
01:46:23that's where you need to think that's
01:46:24you're still going to get that that
01:46:26upside because you still have that that
01:46:28ownership from having that early
01:46:30valuation investment and also you need
01:46:33to remember you do have pro-rata rights
01:46:34and member Sam made the point that you
01:46:36need to exercise those because yes you
01:46:38are gonna get really really really
01:46:40diluted because you're the early money
01:46:42but if you can't afford it and you can
01:46:44keep putting more money in then when you
01:46:46have that liquidity event you should
01:46:48recognize all that upside I think the
01:46:52question was directed towards the safe
01:46:54itself as potentially vulnerable and I
01:46:57don't see that I I think that that's a
01:47:00misunderstanding of the way convertibles
01:47:03convertible debt or a safe actually
01:47:06converted to shares of stock and and
01:47:09again as they said I will hearken back
01:47:11to Sam's idea that it won't matter in
01:47:15the end whether you invest in a safe a
01:47:17convertible note or equity if you invest
01:47:21at ten fifteen twenty or thirty million
01:47:24dollars you'll still have the sort of
01:47:26returns the Daurio saw with if you
01:47:29invest seventy million dollars you can
01:47:30do the math do the math of investing
01:47:32seventy thousand dollars in a in a
01:47:34company that becomes worth ten twenty or
01:47:36thirty billion dollars at a valuation of
01:47:38ten or twenty million and it will be
01:47:45let's go from here
01:48:02so the question was who controls how
01:48:05much money the founders raised on safes
01:48:07and what do you do as an investor if you
01:48:11sign a safe with let's say an eight
01:48:13million dollar cap today and then the
01:48:15founder comes and racism signs another
01:48:17safe with another investor tomorrow at a
01:48:19five million dollar cap so the first
01:48:23part of the question the the founders
01:48:25decide how much they're going to raise
01:48:26on the safes and you know the advice
01:48:29that we give to the founders is to be
01:48:31very thoughtful about how much you
01:48:33actually raise on the safe because you
01:48:35are selling the company you know you're
01:48:37selling part of the company and so we we
01:48:39cancel them to be very careful about
01:48:40dilution and to really think about that
01:48:43so whilst the investor doesn't have a
01:48:46huge amount to say in that the founders
01:48:48are thinking about how to how to make
01:48:51that work for them the second part of
01:48:54the question is about the cap and it's
01:48:58pretty unlikely that you will sign a
01:49:01safe with a valuation cap of 8 million
01:49:03let's say and then the next day they'll
01:49:05sign a cap with 5 million usually you
01:49:09know like like Sam and Jeff have
01:49:11mentioned there is some elements of herd
01:49:12mentality going on in investing and so
01:49:15if if an 8 million cap works for other
01:49:18investors then you know the next
01:49:19investor is likely to take that as well
01:49:21maybe the situations where sometime
01:49:24further down the road they they might
01:49:26raise money with a slightly lower cap
01:49:28and it's really circumstance dependent
01:49:31at that point you know there's there's
01:49:34there's there's nothing written into the
01:49:36documents to protect you from that
01:49:37unless you have the MF n provision in
01:49:40there but you know again we we advise
01:49:44founders to treat people fairly and you
01:49:49know if things have changed or
01:49:50something's happened then then you know
01:49:52see what they can do to help their
01:50:11we see this happen all the time
01:50:13oh did everyone hear that question mm oh
01:50:17for the loaf right okay so what happens
01:50:20when the lead investor in this state
01:50:22let's say you have a safe and it's
01:50:23converting into a series a round and the
01:50:25lead investor is not respecting the
01:50:27rights and the safe for example the pro
01:50:29rata right you need to fight back on
01:50:32this we see this happen all the time we
01:50:34we advocate we tell our founders all the
01:50:36time you do not get to ignore the rights
01:50:39and the safe this is a contractual right
01:50:41you're breaching the contract if you do
01:50:43not give the safe holders their pro rata
01:50:45right this goes back to something her
01:50:47she said - it kind of sucks when they
01:50:49only give you 24 hours to read these
01:50:51documents because you should immediately
01:50:52be going through and making sure that
01:50:55they did give you these rights right and
01:50:57you should also be checking the cap
01:50:59table to make sure that they converted
01:51:01you're safe correctly but so the answer
01:51:03to the question in short is notice find
01:51:05notice it tell them that's not okay push
01:51:08back on it make them honor their
01:51:09contract and oftentimes it's actually
01:51:11the lawyers who are who are trying to
01:51:13make this more streamlined and the
01:51:15founders either don't know it's
01:51:16happening or they haven't really
01:51:18registered and so if you go and say to
01:51:20the founders hey look you know I'm I
01:51:21should have pro-rata rights here then
01:51:23then they'll be they'll be pretty
01:51:24willing to make that change in the
