Why do seed investors and VCs view the SAFE cap as the startup valuation rather than what it was meant to be, just a ceiling for the SAFE investor?

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JASON LEMKIN

This is a subtle but complete misunderstanding of a SAFE.

A SAFE is not a ceiling. It is a floor.

If you raise $2m on a $6m SAFE, and then $3m on a $9m SAFE, and then $4m on a $15m SAFE … and then we all convert at a $8m Series A at $25m pre … and I invested in the first SAFE … there’s no ceiling at all.

First, by the time the round closes, the post-money is $33m ($25m+$8m).

Second, yes I get to invest at a nominal $6m pre, but all the $15m after that diluted my investment immediately. So on effective basis, that’s sort of, kind of, like a $12m+ pre.

Most importantly, I have no idea what % I bought. That isn’t determined until after the Series A round, after the 3 rounds of notes.

So yes, the SAFE does set a fixed set of terms. But it’s hardly a ceiling. Dilution, and thus the effective price, can be almost unlimited after a SAFE investor invests.

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Published on April 7, 2017
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