00:00i would like to introduce kirsty who is
00:04uh in much detail about safe's notes
00:07equity and the like kirsty
00:16all right good morning everybody so
00:20my name is kirsty nathu i'm the cfo one
00:23of the partners here at y combinator
00:25um and i have now worked with probably
00:29over 1500 companies in terms of getting
00:32incorporated doing our yc investment
00:36and then seeing them through their their
00:39either on convertible instruments or on
00:43so i've seen kind of a lot by now um
00:47and so this this presentation is is to
00:50some understanding of some of the things
00:52that people don't necessarily understand
00:54when they're raising money
00:56um and to hopefully help you avoid some
01:00that we've seen with that some of the
01:02mistakes that we've seen founders make
01:07so the key the key message in all of
01:10is that it's important that you
01:12understand at all stages of the
01:14company's life cycle
01:16how much of the company you've sold to
01:20in connection with that how much
01:21therefore you also own
01:23and the thing the thing that makes this
01:25complicated is that most companies will
01:27raise money on convertible instruments
01:30and because those convertible
01:32instruments aren't yet shares
01:33it's not immediately obvious for a lot
01:36of founders how much of the company
01:38so i'm going to talk through some of the
01:42and help you understand how how all that
01:45works so that you don't get surprised
01:47when it's too late and you can't do
01:55so the other thing that you should also
01:59a lot of companies and a lot of founders
02:01will just say oh i don't need to worry
02:04my lawyers deal with my cap table i
02:06don't need to worry and actually
02:08that's a really dangerous statement um
02:10again you should make sure that you're
02:12understanding this it's your
02:13responsibility as the ceo or as the
02:15founder of the company to to understand
02:19and there's lots of ways that you can
02:21maintain your cap table
02:23there's lots of ways that you can you
02:24can keep track of this
02:26and the simplest form is just a
02:28spreadsheet all it's going to show is
02:30who owns how many shares
02:32and that's it that's all you need at the
02:34beginning but there are other services
02:36out there that can help um and i'll i'll
02:40include them on a list of resources
02:42after the presentation but there's tools
02:44cap table dot io and carter which also
02:48for you to keep track of these things
02:52okay so these are the these are the
02:53three sections that i'm going to talk
02:55about first of all i'm going to talk
02:58and particularly for us companies
03:01most companies will raise money first on
03:03safes or some other convertibles
03:06convertible instruments which i will
03:08talk about briefly as well
03:09and i know jeff mentioned the safe last
03:12in a little bit of detail but i'm going
03:15to go into much more detail on that
03:17and also how how the sections of the
03:21the s stands for simple and so hopefully
03:24you will you will believe me with that
03:26ready to understand what's going on in
03:29as you come out of this presentation
03:32then we'll talk some more about dilution
03:34again so you can see we're going to walk
03:36through the life cycle of a company
03:38from incorporation up to raising a
03:41priced series a round so you can see how
03:45how things change over that period and
03:47then i'll give you some top tips
03:49on other other items to do with raising
03:54all right so first of all the safe so
03:56let's cover what it is
03:58and then we'll go through the details of
04:01is built up so as i said safe
04:04the s stands for simple the rest of it
04:06is a simple agreement
04:08for future equity and put simply it's
04:11a instrument where the investor will
04:15in exchange for a promise from the
04:18company to give shares to the investor
04:20at a future date when you raise money on
04:25there are minimal negotiations with a
04:26safe really there's only
04:28two things that you're probably going to
04:29negotiate with the investor
04:31which is how much money you're going to
04:33how much money the investor will
04:35put into the company and what valuation
04:38so really those two things are the
04:43whereas when you compare that with a
04:44priced round there's a whole raft of
04:48and that's what makes a priced round a
04:52to close and to raise money on than than
04:55so so that's why often companies will
04:57start with a safe and then when they
04:59get to the point of being able to raise
05:01more money and they have a lead investor
05:03which they negotiate with for the price
05:05then the safes when they convert into
05:07shares will piggyback on
05:10the terms that has been negotiated with
05:17the other thing to bear in mind is that
05:20so some of you will have raised on
05:23what's known as convertible debt
05:25that's a different instrument um debt
05:28has generally an interest rate attached
05:31to it and it has a maturity date
05:33where the debt needs to be repaid safes
05:36have neither of those things
05:38so it's important to understand that
05:40there is a distinction between the two
05:42instruments but in terms of conversion
05:46in in the way that they convert in a
05:48priced round there are some similarities
05:52so this is the first section in the safe
05:56and this paragraph actually includes
05:58pretty much all the key details
06:00that you need to understand in a safe
06:06in exchange for payment by investor
06:10the investor is putting in a certain
06:14around this date and
06:17down here the valuation cap is some
06:22so really those two blanks are the two
06:27this paragraph here is something that
06:30we've added just recently
06:31in our newest version of safes and this
06:34is something that will hopefully help
06:36so that once you've read our safe that
06:38we have available on our website once
06:41if there's this paragraph on the safe
06:44you have read the safe the idea behind
06:48this is that if anything changes in the
06:51you either the company or the investor
06:53cannot say this paragraph it can't say
06:55that it's the same as the safe that's on
06:57the y combinator website
06:58and so you'll know as a founder that you
07:00should be looking at it more closely to
07:02see what's been changed
07:03so this is just something to keep your
07:05eyes open for when you
07:08when you if you receive a safe from an
07:12okay so the anatomy of the safe is
07:14pretty straightforward it's only five
07:17so it's not very long we've tried really
07:19hard to keep the language
07:21not too legal and so it's easy to
07:25and really it's split into is split into
07:29section one talks about what happens in
07:33um different sets of events and so
07:37most of the time what's going to happen
07:39is there will be an equity financing
07:42at some point in the future and so the
07:44first part of the section talks about
07:45what happens then how does the safe
07:48or there might be a liquidity event
07:50either company might get sold
07:52before the safe converts so it also
07:55addresses what happens
07:56if the company is sold before the say
07:59whilst the safe is still outstanding
08:02or the company might decide to close
08:04down whilst the safe's still outstanding
08:06so it also addresses that
08:09so those are the three real key events
08:12drive change um from the safe so it
08:15addresses all of those and often we get
08:17questions from founders or from
08:18investors saying but what happens
08:20what happens if and actually these three
08:22sections are the answers to pretty much
08:24all of those questions
08:26and then there's a couple of other
08:27sections where we clarify the
08:30liquidation priority
08:31which just means who comes first in the
08:35in these different situations um
08:38and also clarifying that the safe
08:42actually terminates i.e it does no
08:46if any of the top three events happen
08:49so that section is kind of your
08:52if something happens in your company
08:54that's the section you look at to see
08:55what happens to you safe
08:58then the next section section two is
09:00just the definitions section
09:01so anything that we refer to within the
09:03safe will be explained in section two so
09:07what the company capitalization
09:10definition is you go to section two to
09:12look at that for a for an explanation
09:16section three are the representations
09:18that the company makes to the investor
09:21so it's it's saying things like the
09:25the company is duly formed it's it's
09:28correctly formed in delaware um
09:31section four is the representations that
09:34the investors make to the company so
09:36it's things like the investor saying
09:38yes i agree i'm um i'm an accredited
09:43um and then section five is kind of
09:45legal boilerplate language
09:47that that needs to be in there
09:50so really from your point of view the
09:52sections that you really need to
09:54understand are sections one
09:56and sections two obviously you need to
09:58know what you're representing
09:59in section three as well but those
10:01section one and section two are the key
10:04and that bit is only three pages long of
10:08so i'm pretty sure you can all read
10:11and understand what's going on so i
10:14encourage you to do that okay some of
10:19um in the last couple of weeks we
10:22to a different type of safe um
10:25we've really we've introduced the
10:27concept of post money safes
10:31and it's important that we
10:34understand what post money means what it
10:38is after all the safes have converted
10:41at that point and we'll go into that in
10:44a little bit more detail
10:45in a moment but it's it's easy to get
10:47confused about what post money means
10:49here but it's after all the safes
10:51um and the reason why we introduced
10:55we wanted to make it easier for founders
10:58the dilution that they were taking i.e
11:01how much of the company they'd sold to
11:04how much less of the company they owned
11:07it was all it's a lot easier to to
11:10understand that with post money safes
11:12than with the previous safes that we had
11:13which were known as pre-money safes
11:22okay so basically when we're talking
11:24about pre-money and post money
11:26we're talking about the same thing it's
11:28just a different way to
11:31express it to explain it and so
11:34in both the priced round and for safes
11:36the formula stays the same so the
11:40plus the amount of money raised equals
11:43the post money valuation
11:45of the company okay so if you have
11:48a five million dollar pre-money
11:51and you raise a million dollars then the
11:54post money valuation of the company
11:56is six million dollars okay
11:59and that's important to remember in a
12:03but really that's that's as simple as it
12:08so then based on that so that you can
12:11how much of the company you've sold when
12:13you're raising money
12:14um on safes the formula is just
12:18your owners or the ownership of the
12:20investors the ownership that the the
12:23is their amount raised divided by the
12:27either valuation in the case of a priced
12:29round or valuation cap
12:31in the case of a safe
12:34so in our example before if the
12:36investors were putting in one million
12:39and the post money valuation was six
12:42then they will own sixteen point six
12:45of the company does that all make sense
12:51okay good so i'm going to i'm going to
12:54only about safes with valuation caps
12:57here to keep things simple but just be
12:59aware that there are
13:00other different flavors of safes that
13:02you can use and that you may have
13:06or that you may find that you you use in
13:08future so there may be the concept
13:10of a discount instead of a cap um so
13:12instead of capping the valuation at say
13:16it says um there's a there's a 20
13:20on the series a price
13:23there's also an uncapped safe which
13:25basically just says i'm going to put
13:27money in now as an investor and when you
13:30i'll get the same price as the priced
13:34investors are going to get that's pretty
13:37uncommon because the investors who are
13:40early want some kind of bonus for
13:42putting in the money early
13:44um so so it's pretty unlikely that
13:46you'll you'll use one of those
13:49and then finally there's a safe that's
13:53most favored nation clause which
13:55basically what that says
13:57is i'm not going to agree
14:00a cap right now but if you raise some
14:02money from some other investors who do
14:05and that those terms are better than my
14:07terms i get their terms
14:09as well as an investor so this one can
14:12sometimes happen if you're raising money
14:14and you don't really know what the cap
14:16is and maybe you know you just want to
14:18punt it for another month or two
14:20um but it just creates a little bit more
14:22admin for the founders because it's
14:24another thing that they have to
14:26keep track of um so we we see them
14:28sometimes again not all that common
14:31um by far the most common is just the
14:35only all right so now
14:38we understand safes and how they're made
14:41up we're going to talk about dilution
14:43and understanding how your cap tables
14:47all right so we're going to we're going
14:49to walk through this process so we're
14:50going to start with our company hitting
14:53which uh carolyn talked about right at
14:56the start of the startup school course i
14:58believe so hopefully
14:59this will not be anything new to you
15:01then we're going to talk about what
15:02happens when you raise
15:03on some raise money on safes on post
15:07then we're going to talk about what
15:09happens as you hire people
15:10and start to issue equity to employees
15:14and then the company is going to do a
15:17and so what happens to the cap table at
15:20and now i'll warn you this is starting
15:22to get into the math section
15:24of the whole thing so turn your brains
15:26on and keep concentrating
15:30all right so incorporation so let's just
15:33assume it's a really simple company
15:35there's two founders and they split
15:39equally between the two of them so in
15:42each founder owns 4.625 million
15:46shares so there's a total of
15:499.25 million shares issued and each
15:54that's pretty straightforward right and
15:58in order in order for them to own those
16:01the founders have done the paperwork
16:02they've granted those shares
16:04through a restricted stock purchase
16:05agreement and there's vesting on those
16:08as was talked about with with carolyn
16:11um earlier in the the course
16:17okay so then the next thing that's going
16:19to happen is this company
16:20raises some money on a post-money safe
16:23and they raise from two
16:24investors so the first investor comes in
16:28and they put in two hundred thousand
16:31a four million dollar post-money
16:34valuation cap and then a little bit
16:37investor b comes in puts in 800 000
16:40at an 8 million dollar post money
16:45so if you remember back to our formulas
16:49the ownership that investor a has at
16:54is their amount of money that they've
16:56put in divided by the post money
16:59which gives them five percent of the
17:02same for investor b 800 000 over 8
17:05million which gives them 10 percent of
17:08so in total the founders at this stage
17:1115 of the company so even though
17:15this doesn't change the actual cap table
17:17because these aren't shares at this
17:19point this is just a safe this is just a
17:21promise to give shares in future
17:24the founders should know at this stage
17:26that they have sold 15 percent of the
17:29and if they've sold 15 of the company
17:31then they can no longer own
17:33a hundred percent of the company so now
17:35instead of the founders owning a hundred
17:37percent of the company between them
17:39they've been diluted by the fifteen
17:41percent so they're going down
17:43to eighty-five percent of the company
17:47so it's important to have that in your
17:48brain when you're raising money
17:50because whilst the cap table like i say
17:54the fact that you've just sold 15
17:56percent of the company
17:57is an important fact and it's an
17:59important thing to know
18:00because you want to make sure that
18:01you're not selling too much of the
18:03because you know that there's a lot of
18:05future fundraisings that are going to
18:07happen with the company
18:08and therefore there's going to be more
18:14is everyone happy with how we've got to
18:15that fifteen percent
18:18yes the question so the founders are
18:22only ones getting diluted at this point
18:24uh the earlier investor doesn't get
18:25value right so the question is
18:27it's only the founders that are being
18:29diluted at the moment and yes that's
18:30that's exactly right
18:32because that's the construct of the post
18:35the all the later the later safe
18:39investors don't dilute the earlier safe
18:42it just dilutes the existing
18:43shareholders and at this stage it's just
18:46the founders who are the existing
18:51does it make sense to have shares in the
18:55so that they can cover the anticipated
18:59okay so the question is does it make
19:01sense to have shares
19:03authorized but unissued i think is what
19:06so at this stage it doesn't necessarily
19:08make a difference as you'll see in a
19:10you actually create new shares that
19:11you're going to issue to these these
19:13safeholders when they convert
19:15um so at this stage it's it's fine to
19:17just have the shares that
19:19the founders have and maybe some that
19:21you want to give out for hiring
19:24why investment d has different uh post
19:28money valuation cap well in this example
19:30so the question is why do they have
19:32different post money valuation caps and
19:35um you know it could it could be for
19:37very any number of reasons but in this
19:39example we're assuming that you know
19:41this one happened maybe a month after
19:43incorporation and maybe this one
19:44happened six months after incorporation
19:46and more as more has gone on in the
19:49slightly less risk and so the company
19:51has been able to negotiate a different
19:53but things things change through the
19:54company and it's totally fine to have
19:56different caps because as you can see
19:59you just you just calculate everything
20:02and then add it all together okay so
20:05companies raised a million dollars
20:08first thing it's probably going to do
20:10with that money is hire some people
20:13and when you hire employees you're
20:15probably going to give them some equity
20:18and so in this example the company
20:20creates at this stage
20:21a option pool otherwise known as an esop
20:25or an employee incentive plan there's
20:27lots of different names for it
20:29um and in this example they have created
20:32a plan or a pool that has 750 000
20:36shares in it and they've issued out of
20:43early employees so this has now changed
20:48because they've issued shares and so the
20:51there's more shares um being being
20:54issued means that the cap table changes
20:55because we now have more
20:56shareholders and so now we have
21:01a total of 10 million shares that have
21:04um fully diluted basically means the
21:07combination of issued
21:08and set aside in the options pool
21:13in this case so now we have our founders
21:16instead of owning a hundred percent
21:18have 92.5 percent of the company
21:21and the option plan in total is seven
21:26of the company but remember
21:30those safes so these founders don't
21:35because they have also sold 15 of the
21:40and so actually they own less than the
21:4392 and a half percent
21:44um they've actually they actually own 85
21:49of that which is about 78.6
21:52so again this is where it gets dangerous
21:55if they forget about the safes the
21:57founders are sitting there saying well i
22:00this is great i own still loads of the
22:03have forgotten about the safes and the
22:05dilution they're about to take from that
22:07so again it's really important to keep
22:09track of how much you've sold
22:12on your safes so that you can
22:15do that calculation and say actually i
22:19i have 85 of that because i've sold 15
22:22of the company but it's also
22:27these numbers have been diluted by those
22:31so as you'll see in a moment these
22:33numbers change as well
22:41okay so now we're going to fast forward
22:43about let's say a year
22:45um the company is doing well
22:48it's raised a price round and it has a
22:50term sheet for the price round which
22:53pre-money valuation of the round is 15
22:57and they're going to raise a total of 5
23:00of which the lead investor which is the
23:04do all of the negotiations with is going
23:06to invest four million dollars
23:09and so if you remember from our formula
23:13the post-money valuation is the
23:16pre-money valuation plus the total raise
23:18so the post-money valuation is 20
23:22the other thing that gets negotiated as
23:25part of the price round
23:26is the option pull increase
23:30so generally what happens is that the
23:32investors in the series a will say okay
23:34we're going to put some money in
23:35we know that this money is going to go
23:37towards hiring so we want you to create
23:39an option pool for all the new employees
23:41that you're going to
23:42employ and give equity to in advance
23:46so that it's sitting there ready for
23:47those employees and so
23:50usually you see that the um the option
23:53pool is about 10 percent
23:54it might go up to about 15 but anything
23:58is fairly non-standard
24:03yes where did that come from over there
24:09so you so the question is is the 10
24:11coming from founders or collectively and
24:13you'll see in a moment is going to
24:15dilute the existing shareholders
24:17and the safeholders but it doesn't
24:19dilute the new money
24:23so how is that option tool represented
24:32so the question is how is the option
24:33pool represented on the cap table so
24:35if we go back to here we just show it so
24:40the options available from the pool that
24:43is a line and anything that has been
24:46issued from the pool is a separate line
24:48the reason why we show those two things
24:50separately is that these
24:52these shares are considered outstanding
24:53they're considered issued
24:55whereas these aren't and so that's the
24:57difference between what
24:59that's what fully diluted means it means
25:01outstanding shares which are these two
25:03plus any shares reserved under the
25:11all right where are we oh so so
25:15quick quick maths question for for you
25:18what do we expect that the um
25:22lead investor will own what percentage
25:25of the company do we think the lead
25:26investor is going to own
25:28after the round closes
25:3320 yeah for the lead investor 25
25:37in total for all of the series a
25:42okay because they're the lead investor
25:44is going to put in 4 million
25:47divided by 20 million dollars gives 20
25:49so you'll see in a minute the cap table
25:52that that all works through in the
25:53calculations but it's always good to
25:57check so that you can sense check what's
25:59going on in your cap table
26:04all right so in a priced round where you
26:07or where the company has raised money
26:08just on post money saves
26:10and then has raised a priced round three
26:15and these three things happen at the
26:17same time in terms of the documents
26:19but in terms of the calculations it's
26:22order is correct and so the three things
26:26with post money safes
26:28is that the first thing that happens is
26:30the safes convert into shares
26:33then an options pool is increased or
26:36created if there isn't one already
26:38and then the new investors invest and
26:40you'll see in a minute how that all
26:43with the calculations
26:46now one other thing that starts to get a
26:47little bit confusing here
26:49is one of the the sort of the lingo of
26:52how this works is that often
26:54the the lawyers and the the founders
26:58safes being included in the pre-money
27:00and what that's basically saying
27:02is that when the new investors invest
27:04and they calculate their price per share
27:07the calculation includes the shares
27:10from the conversion of the safes so even
27:13though the safes themselves
27:15are referred to as post money safes
27:18that's talking about how the safes
27:21this sentence where the safes are
27:23included in the pre-money
27:25is talking about how the series a price
27:28so it gets a little bit confusing
27:30because it's talking about post money
27:32but that's just something to bear in
27:33mind when when this happens and
27:36obviously at the time that you're
27:37raising a priced round you're going to
27:39have a lot of advisors you're going to
27:40be working with lawyers who can explain
27:42all of this to you as well
27:46all right let's go through these three
27:49so the first step is our safes are going
27:53and we already know because we've
27:55already done the calculation
27:57that these safes are going to convert
28:01of the company and so 15 of the company
28:05means 15 of the total fully diluted
28:08both common shares and preferred shares
28:11so investors get preferred shares which
28:14a different set of rights and privileges
28:17the common shares which is what the
28:19founders and employees
28:21get so we have enough information here
28:27that we have here to calculate what the
28:30actual number of shares are here
28:32because we know that they're going to be
28:3315 of the total issued shares
28:36so we know that this is 85
28:40of the total issued shares so we know
28:43and then once we get the totals we can
28:45work out what five percent of that
28:47is and what ten percent of that is so
28:50after a bit of algebra these are the
28:54through so now at this point we have
28:5711 million 764 705 shares
29:02in total because it's preferred shares
29:08our first safe investor who we said was
29:09going to have five percent
29:11has 588 000 shares which represents 5
29:14percent of that 11.7 million
29:17and our second safe investor has 10
29:22now it's important to remember that this
29:26through a whole process it's part way
29:27through those three steps
29:29that are happening in a priced round and
29:31so actually you're never going to see
29:34looking like this this is this is just
29:36one step in the calculation but it's
29:38just to break out so that you can see
29:40where that 15 percent
29:41has come from and you can also see here
29:45that when we were saying that the
29:46founders instead of owning
29:47um 92.5 they owned about 78
29:52you can see that here because they've
29:53been diluted by that 15
29:56as have the um employees with their
30:00so this is this is the post money part
30:03of the post money safes
30:05after the safes have converted but
30:08anything else has happened in relation
30:18all right so the next step is oh we
30:20gotta have a question
30:21okay uh so the percentage of uh if you
30:24so the the five percent ten percent that
30:27has nothing to do with the
30:29whole situation and they said they
30:32okay so the question is it doesn't does
30:34the five and ten percent have any
30:41yeah okay so yeah so the five and ten
30:43percent is based on the valuation cap
30:46in the safe and so assuming the priced
30:50valuation is higher than the valuation
30:54then it this is just looked at with
30:56reference to the safe
30:57and it's just connected to the the
31:05in the very rare circumstances that the
31:08price round is lower
31:10than the valuation cap on the safe then
31:13actually these safe investors will get
31:15a better deal because they will sell
31:18their safes will convert at the same
31:21that the series a investors have um
31:24which is a lower price than the
31:25valuation cap so actually there is the
31:27potential that this can go
31:28up um this percentage can be higher if
31:32is valued at a lower price
31:35than the cap on the safe
31:38that doesn't trigger the conversion
31:42it still triggers the conversion even if
31:43the valuation is lower because it's the
31:45fact that they've raised money that
31:47conversion not the price so it's just
31:50something to bear in mind that
31:51when we're talking about this that post
31:53money saves and in this example that
31:55you're you're selling 15
31:56of the company there is potential that
32:00but it's a pretty rare situation where
32:03you raise a priced round that's priced
32:06than the the valuation of your safes
32:09and it's also something to bear in mind
32:11of trying not to negotiate too hard on
32:13the safes to make your your caps too
32:16because if you raise money on 100
32:17million dollar cap but then you can only
32:20a 25 million dollar priced round let's
32:23then you're actually selling more of the
32:25company to those safeholders than you
32:35okay so the question is if there's
32:36convertible debt so this would this
32:40as well so it would that the calculation
32:42for convertible debt is
32:43is slightly different um but it would
32:46in here and you would show them just as
32:48other investors because they would be
32:50converting into shares
32:51in relation to the price round as well
32:56what if you went crazy and actually gave
32:59or sold 85 percent of your company and
33:01the valuation is lower at the end what
33:03you can't share with them well so that's
33:06the big question so the question is what
33:09happens if you go crazy and sell 85
33:11of your company that yeah i mean that's
33:15um that founders can can raise too much
33:19on too low valuation caps when they're
33:21raising on convertible
33:22instruments they don't realize how much
33:24dilution they're taking
33:25and then they get to their priced rounds
33:27and they look at their cap table and
33:29what i only own you know 10 of the
33:32and unfortunately there's not a huge
33:34amount you can do at that point because
33:37entered into the contracts with the
33:39investors to to do this
33:41and so that's why it's important to not
33:43get into that situation in the first
33:49that the saves are price
33:52of the cap is higher than the price
33:55it would lose actually a lot more can
33:58you explain that because i thought the
34:00it would uh although the price of the
34:03gap was actually the cap right because
34:09so yeah so the question is how to how
34:11the cap works in terms of
34:13in relation to the priced rounds so if
34:15the if the price round
34:17is higher than the cap then the safe
34:21which means that the safeholders
34:23basically get more shares for the same
34:26than the series a investors get so
34:29that's in that situation that's how you
34:32what percentage you're selling but in
34:34the situation where the cap
34:35is higher than the priced round
34:39then you would never
34:43it it wouldn't be fair to the
34:44safeholders to have them getting a worse
34:47than the series a investors because they
34:50put money in earlier
34:51and so what happens then is that you the
34:55if you remember if you go back to the
34:57section one of the safe where it says
35:00price equity round situation it says
35:03if the if the cap is
35:06um if the cap is higher than the price
35:09then they just use the priced round
35:11price to calculate their shares
35:13and so because that priced round price
35:16these numbers will go up
35:24well it depends it depends on the delta
35:26so if it's if it's only a little bit
35:28different then yeah maybe instead of 15
35:30they've sold 16 let's say but if it's if
35:33the delta is really big then it could go
35:35but again it's it's something to be
35:39in the current environment it's pretty
35:42um people raise price rounds at
35:45lower valuations than their safes just
35:47because when you're raising money on
35:49the investors won't agree to invest at a
35:52ridiculously high valuation
35:54because they want they want to get that
35:56bonus of the lower price
35:58when they say when their saves convert
36:02yeah okay let's keep going
36:06all right so this this step you're going
36:07to have to trust me on
36:09um so the next step in the in the
36:12is that the option pool is increased
36:15and this is actually quite a complicated
36:17calculation it gets a little bit
36:20and i'm going to be sharing a model with
36:21everybody so you can see how this works
36:23if you're interested
36:24but basically what you're trying to do
36:28of um the post-money shares are sitting
36:31available in the option pool and in this
36:33example we're going to increase
36:35our option pool by 1.695 million
36:38and you'll see in a minute that that
36:41flows through into the cap table and
36:44but just trust me on this one because
36:45this is this is quite a complicated
36:50and then step three the new money
36:52invests so this is where we have our
36:55series a investors putting in five
36:58and there is a couple of calculations
37:01in there um so the price per share
37:04that's calculated for the round is the
37:08divided by the capital capitalization so
37:10this is the pre-money valuation
37:1215 million and when we're talking about
37:16what we are meaning is this is the total
37:19fully diluted shares
37:21after the safe conversion and the option
37:25so that's why this is step three because
37:26our sha our safes have converted
37:29and our option pool has increased and so
37:33our 10 million shares that we'd issued
37:359.25 to the founders
37:38725 000 in the options pool
37:43um plus the safe conversion shares plus
37:46the increase in the options pool
37:48and you'll see the numbers in a moment
37:50so then the number of shares that the
37:51series a investors get
37:53is the amount they're investing divided
37:55by their price per share
37:58so those are the three calculations that
38:00you need to remember for your
38:06so here we go here's here here are those
38:09calculations so we're saying that the
38:12we have our 10 million shares that were
38:15we have our 1.76 million shares from the
38:18conversion of the safes
38:20and we have our increase to the option
38:22pool of 1.695 million
38:24so that gives us 13.5 million total
38:29we divide our 15 million dollars by
38:32to get a new money price so this is the
38:35price that the investors will pay for
38:41so that means that the 5 million dollars
38:45that's coming in will buy 4.48 million
38:50shares and the lead investor because
38:52they're putting in 4 million
38:54will get 3.59 million of those shares
39:01so these are the calculations that get
39:03that get worked through
39:05this is what the cap table then looks
39:09post money so this is now everything's
39:11been done in the round
39:15so we've still got our founders we've
39:17still got our options
39:18those numbers haven't changed this
39:20number's changed because it's increased
39:25and you can see here that now this is
39:29ten percent of the total shares which is
39:30what we were targeting
39:32because that was agreed in the term
39:35we have our safe investors who the
39:37number of shares haven't changed
39:39because they already we'd already done
39:41their calculation for the conversion
39:43but their percentages have changed it's
39:45gone down a little bit
39:46and the reason why those have gone down
39:48is because the safe investors have been
39:52by the series a money and by the
39:54increase in the options pool
39:57and then we have our lead investor and
40:01in our series a and as you remember when
40:04the quick back of envelope calculation
40:06at the point of getting the term sheet
40:09our lead investor owns twenty percent
40:11our other investors own
40:12five percent so in total they have 25
40:17and so the founders up here now own 51.5
40:21which is a big jump from the cap table
40:24originally were looking at where they
40:29and that's where this gets complicated
40:31if you don't understand your dilution
40:33you don't understand how much of the
40:35company that you've sold
40:36when you get to this point and you look
40:40and you're saying oh no i only own 30 of
40:42the company how did that happen
40:44there isn't a lot you can do because
40:46most of that dilution has already
40:49because you've raised money from the
40:50safes the because you raise money on
40:53and so that's why it's super important
40:56keep track of this dilution because at
40:58this point there isn't a lot you can do
41:08so a couple of couple of top tips for
41:11we've mentioned briefly about
41:12convertible notes and that's just
41:14another instrument that you can use to
41:16raise money in the early days
41:18um often we find companies outside of
41:21the us will raise money on convertible
41:24there's nothing wrong with it um
41:27it is a little bit more complex just
41:29because you have to deal with
41:30interest that accrues on it and maturity
41:34companies companies deal with that but
41:36what i would say is try not to have a
41:39of safes and convertible notes just
41:41because it makes things a little bit
41:43more complicated in the calculations
41:45so if you start raising on debt then
41:48probably stick with it
41:49but ideally start with safes because
41:51it's actually making your life a little
42:00recommending that companies use
42:02post-money saves but there are pre-money
42:04saves available and some of you may have
42:06already raised on pre-money saves
42:08that's totally fine um it just makes it
42:10a little bit more complicated to
42:13but you can still do the same back of
42:15envelope calculation to get a ballpark
42:17figure even though it's not exactly
42:22if you have raised money on pre-money
42:25safes then it's fine to come
42:27to in future raise money on post money
42:31the calculations just get a little bit
42:33complex but it's it's totally doable so
42:35that's fine don't panic
42:37um would suggest that you probably move
42:39on to post money safes
42:41um even if you've raised money on
42:42pre-money saves just so you can keep
42:44track of your future dilution
42:48and a quick word on optimization in all
42:51when you're raising money on safes don't
42:53try to over optimize for the cap
42:55it gets really easy to start seeing this
42:58um a competition and you start talking
43:01to your friends and you start saying
43:02well i've raised money on a six million
43:04dollar cap and they say well i've got an
43:05eight million dollar cap and so i'm more
43:06successful than you are
43:08and you know as jeff mentioned last week
43:12the be-all and end-all it's a means to
43:15just don't don't try to over-optimize
43:18don't try to push this
43:19up too far because you're negotiating
43:22with investors who do this all day and
43:24and you're probably not somebody who
43:25negotiates this all day and every day
43:28and actually um when i ran the numbers
43:31on the calculation that we've just been
43:32through if we'd have changed that 800
43:35000 that was raised on an 8 million cap
43:38to a 10 million cap the ownership at the
43:42close for the founders would have been
43:46rather than 51.5 so it's not actually a
43:49especially if you have two or three or
43:51four founders co-founders
43:53and the extra pain for negotiating that
43:56two million dollar cap
43:57is probably not worth it you know just
44:01do what you need to do with the money
44:02and make the company a success instead
44:08okay so in conclusion use post money
44:13where you can hopefully all of you can
44:16use those going forward
44:18understand what you're selling with the
44:19company so make sure that you keep track
44:23and understand where where the company
44:28and finally again don't over optimize
44:31for valuation caps because it doesn't
44:34actually make as much difference as you
44:36think it's going to make
44:37thank you very much for listening i know
44:39this stuff's difficult
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