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The Finance of Startups: For Dummies (Part 9.5 – Examples of a Safe)


I wanted to continue on my last post considering the simple agreement for future equity (“safe”) by reviewing a couple examples of how a safe works.

As mentioned in the last post (Part 9 – Raising Funds through a Safe -- follow to understand the concepts), there are a few combinations safes using levers such as discounts and valuation caps (or cases with neither which likely includes an MFN provision). Let’s walk through a few examples:

Example 1: No Discount, Valuation Cap


Post-Money Valuation
Investor Invests in Safe
$100,000
Discount Rate
None
Valuation Cap
$5,000,000


Post-Money Valuation
New Investment through Series A Equity Financing
$1,000,000
Pre-money Valuation
$10,000,000
Fully-Diluted Outstanding Capital Shares
11,000,000

Here, the company will issue sell shares at $0.909 per share ($10,000,000 ÷ 11,000,000 shares). Thereby, the company issues 1,100,110 shares ($1,000,000 ÷ $0.909).

However, the safe investor from earlier will be issued shares at $0.4545 per share ($5,000,000 ÷ 11,000,000 shares). The per-share price is based on the $5,000,000 cap as it is lower than the $10,000,000 valuation from the Series A fundraise. The safe investor would then be issued 220,022 shares ($100,000 ÷ $0.4545).

Note: this assumes the company does not pay back any amount of the initial $100,000 safe investment.


Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.909
$0.4545
Investment Amount
$1,000,000
$100,000
Series A Preferred Stock Issued
1,100,110
220,022

Example 2: No Discount, Valuation Cap


Post-Money Valuation
Investor Invests in Safe
$100,000
Discount Rate
None
Valuation Cap
$4,000,000


Post-Money Valuation
New Investment through Series A Equity Financing
$600,000
Pre-money Valuation
$3,000,000
Fully-Diluted Outstanding Capital Shares
12,500,000

Here, the company will issue sell shares at $0.24 per share ($3,000,000 ÷ 12,500,000 shares). Thereby, the company issues 2,500,000 shares ($600,000 ÷ $0.24).

However, the safe investor from earlier will be issued shares at $0.24 per share ($3,000,000 ÷ 12,500,000 shares). The per-share price is based on the $3,000,000 valuation as it is lower than the $4,000,000 cap. The safe investor would then be issued 416,666 shares ($100,000 ÷ $0.24).

Note: this assumes the company does not pay back any amount of the initial $100,000 safe investment.


Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.24
$0.24
Investment Amount
$600,000
$100,000
Series A Preferred Stock Issued
2,500,000
416,666

Example 3: Discount, No Valuation Cap


Post-Money Valuation
Investor Invests in Safe
$20,000
Discount Rate
80%
Valuation Cap
None


Post-Money Valuation
New Investment through Series A Equity Financing
$400,000
Pre-money Valuation
$2,000,000
Fully-Diluted Outstanding Capital Shares
10,500,000

Here, the company will issue sell shares at $0.19 per share ($2,000,000 ÷ 10,500,000 shares). Thereby, the company issues 2,105,263 shares ($400,000 ÷ $0.19).

However, the safe investor from earlier will be issued shares at $0.152 per share ($5,000,000 ÷ 11,000,000 shares = $0.19 per share * 80% discount). Notice that the price-per-share must be discounted to arrive at a discounted price-per-share. The safe investor would then be issued 131,578 shares ($20,000 ÷ $0.152).

Note: this assumes the company does not pay back any amount of the initial $20,000 safe investment.


Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.19
$0.152
Investment Amount
$400,000
$20,000
Series A Preferred Stock Issued
2,105,263
131,578

Example 4: Discount, Valuation Cap


Post-Money Valuation
Investor Invests in Safe
$100,000
Discount Rate
85%
Valuation Cap
$8,000,000


Post-Money Valuation
New Investment through Series A Equity Financing
$1,000,000
Pre-money Valuation
$10,000,000
Fully-Diluted Outstanding Capital Shares
11,000,000

Here, the company will issue sell shares at $0.909 per share ($10,000,000 ÷ 11,000,000 shares). Thereby, the company issues 1,100,110 shares ($1,000,000 ÷ $0.909).

However, the safe investor from earlier will be issued shares at $0.72727 per share calculated by the minimum of:

  • Valuation Cap: $8,000,000 valuation cap ÷ 11,000,000 shares = $0.72727 per share.
  • Discount: $10,000,000 full valuation ÷ 11,000,000 shares = $0.909 per share × 85% discount = $0.77265
Thus, the minimum price-per-share is $0.72727. The safe investor would be issued 137,500 shares ($100,000 ÷ $0.72727).

Note: this assumes the company does not pay back any amount of the initial $100,000 safe investment.


Standard Preferred Stock
Safe Preferred Stock
Price Per Share
$0.909
$0.72727
Investment Amount
$1,000,000
$100,000
Series A Preferred Stock Issued
1,100,110
137,500

And...

You can find more examples on the Safe primer by the Y Combinator team here.

What questions do you have about safes? How do you view safes to be advantageous for both entrepreneur and investor?

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