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?
A friend looking to raise money recently told me a new form of raising money I hadn’t heard of before referred to as a Safe (simple agreement for future equity). A safe is a mechanism Paul Graham and his YC partner and lawyer Carolynn Levy created as an alternative to convertible notes – refer Finance of Startups: For Dummies (Part 4) for a short description of convertible notes.

Safes are meant to remove the clutter and complications of convertible notes in that they are not debts themselves. Instead, they are agreements for rights to the purchase of future stock – goal is to convert safeholders into stockholders.
  • Convertible notes can be highly regulated via their maturity dates, interest rates, etc. Safes, on the other hand, have no maturity date and as they are not debt, are not beholden to regulations regarding interest rates.
  • Safes remove the complexity of having to extend maturity dates as there are none (vs. convertible notes).Safes are converted to equity at specific events such as an equity financing round, liquidity event, or dissolution of the company (insolvency).
  • Like convertible notes, there are variations to the safes – those with a discount, valuation cap, or some combination of those two (with/ without) or none at all – instead, with an MFN (“Most Favored Nation”) provision.
  • Most Favored Nation provision (MFN) are used to amend a safe’s terms with a safe raised at a later date. This is common for safes with no discount or cap set. Note: safe can only be amended once, not multiple times.
Safes have been a big hit for YC-backed companies, and have been finding traction here in ATL for early stage startups looking to raise funds quickly without the battle over valuation. For more details on safes, check out this primer.

What are your questions about safes? If you were a startup or investor, what would your apprehensions about safes be? Versus convertible notes?
Wasn’t long ago when I hit my 100th blog post, and I decided to hack my writing style with 15 posts 300-words or less as well as test post frequency.
At the end of the exercise, some thoughts:
  • 300 words was arbitrary, but it was a test for effectiveness and readability (my “MVP”). During the 15 posts, I’d write full drafts (~400-500 words) before trimming. After 30 minutes, I’d get to sub-400, and painstakingly carve potentially good content to get to 300. I’ll opt for 400-word limit moving forward with judgement.
  • I thought posting twice weekly would boost readership. It does… kinda. Multiple posts are great especially with sites like Atlanta Tech Blogs which showcase the latest posts from startups and entrepreneurs; however, I get “organic” traction just fine with daily social shares.
  • Two posts weekly is tough for me. Inspiring content is the challenge. More than twice a week would be unsustainable for me at the moment. I’ll still do two-a-weeks till October.
  • Friday, Saturday, Monday aren’t great times to share at 11AM or 2PM. I’ll gather data from Google Analytics later. For now, anecdotally, the best days to post on any outlet (LinkedIn, Twitter, and Facebook) are Wednesday, Tuesday, and Thursday (in order).
  • I love how Hypepotamusshares a post multiple times a week socially. Before, I did one social blast per post, but realized I was missing opportunities with multiple shares. Now, I share a single article several times citing quotes from the article on social media outlets — each day for a week after the initial post. I get more residual Favorites, Shares, Retweets, Comments, etc.
I’m always looking for ways to improve, and this was a great exercise to improve my writing and overall communication skills.
What are some other ways I could change up my writing style? Any other recommendations on writing style or what blog/ writing styles you’ve enjoyed reading?
I was recently introduced to a wantrepeneur building a platform with an experiential method of consuming media with an ecommerce side to it. I’m skeptical of the experiential component. Then again, I’m skeptical of a lot. Instead, show me the numbers (user engagement, traction, and any revenue numbers). However, she has none to show, and isn’t actively able to provide any.
She has a great v1.0 already that can be marketed to test traction and gather feedback, but she’s reluctant, opting for a feature-full release. After months with v1.0, progress is on hold as she seeks funding to build her “needed” features.
ZERO users. ZERO revenue. Ideas on business model, but that’s it. Trying to raise six figures. That’ll be tough.
Some thoughts:
  • Seeking funding takes TIME! My friend underestimates the efforts to raise funds — prospecting potential investors, setting up meetings, creating pitch decks, etc.
  • With or without funding, what’s happening? Her “startup” is stagnant. There’s no feedback from users (none anyways). No product development. Each day that passes, the market evolves, and a competitor entrenches itself with the market.
  • Life happens. How do you cope? My friend’s early partners have left due to life complications. This happens. However, she’s stuck unsure of how to proceed like hoping a good, cheap developer falls into her lap.
  • Raising funds with no traction in a difficult-to-defend market?! Startups and entrepreneurship are today’s “it” thing, so there’s lots of noise from those seeking money. Investors mitigate some risk by startups’ traction.

I like TechCrunch’s “Wasting Time with the Joneses” article calling funding as “hyperdrive, not a joy ride”. That is, “If you lay in the proper course, it will take you far. If you haven’t, you’ll just be way off the mark and beyond the reach of anyone to save you.”

What are the traps of seeking funding while still in the early stages of product development? How could entrepreneurs be successful in raising capital without traction?
Given deadlines, budgets, and other limitations, entrepreneurs should opt to trim the scope of a product/ feature list over sacrificing quality. Of course, if entrepreneurs are truly building an MVP, there won’t be too much room to trim.
In cases I’ve alluded to in my previous posts, many startups and wantrepreneurs make the mistake of jam-packing version 1.0 with several features without giving much attention to quality.
Having started a development shop recently with a couple previous partners, we must manage expectations. Many clients ask for feature-filled products from the get-go. We’ll provide them our thoughts on a more lean approach, but also give them what they asked for. Unsurprisingly, many companies and wantrepreneurs are sticker-shocked… some naivety to the technology and development world, many believe coding/ programming is simple and can be done cheaply.
With a budget half of our estimate, many still ask to fit all the features in believing they can sacrifice some level of quality in favor of more features. However, we push back – trimming scope rather than quality knowing that delivering all of the features would likely leave the product susceptible to quality issues.
In many markets, and indeed relationships, customers are less-forgiving regarding crashes and bugs vs. believing “in the vision” of what a product could be. That is, if customers are trialing a product, a feature-filled product with several bugs can be hard to use. Any feedback received will likely be around the bugs themselves.
Instead, the advisable route would be obtaining feedback regarding user experience and desired features – a well-built product with limited scope. User feedback would then lean towards “asking for new features” – the market pulls the startup in a direction with demand and products aren’t over-developed.
How could you argue features could be valued over quality? How else could stringent facets like timelines, budget, and the like be mitigated? What conditions would customers be more forgiving regarding quality of a new product or service?
Working with several startups over the last couple years, I’ve noticed a recurring theme with well-funded companies using third-party contractors – that is, many sacrifice quality in favor of urgency to deliver a more feature-rich product oftentimes by cutting corners.
That is, startups aim for seemingly arbitrary dates to deliver a product, forgoing things like customer discovery or shifting responsibilities to contractors. In some cases, contractors have not worked in the startup environment or are bought into the business to make the best decisions.
  • I believe the “business” should define what the user flow (experience) should look like with input by a UI/ UX designer. Except in one project, the business shifted user flows to the UI/ UX designer. Being an outside resource without the experience of the business, the designer was left to insert his own vision. So when designs were up for approval, the business owners threw up all over them. Why? Because the designs didn’t match their vision.
  • An early-stage entrepreneur launched a new travel platform without testing the product with customers and gathering feedback for customer acquisition. His previous life in investment banking funded his startup’s six-figure development costs. However, when he launched, he had no answers to how to acquire customers in a highly competitive market. He ended up shutting down almost immediately.
Funding/ money is a funny thing – you want it, but without control, can set unrealistic expectations and take the scrappiness out of startups. You may expect quality to go up, but instead, efforts to ameliorate investors by hitting deadlines motivate the startup to cut corners and sacrifice quality; whereas in bootstrapped, lean startups, quality is tuned to critical elements, and growth occurs more organically.
These aren’t rules… but rather anecdotes of what I’ve seen.
What are your thoughts on how funding has affected startups and expectations? How would you implement some of the lean startup and scrappy methods in a well-funded startup? How else could startups use contractors more effectively?
I wish we had tracked user engagement better with Body Boss; though, I knew where coaches were getting stuck and why they weren’t experiencing the value of what we built. I have a list of 85 schools who trialed Body Boss within 14 months, but only converted 16%. To boost conversion, we added features… Whoops!
We built several features that did lead to conversions and got us closer to product-market fit. That is, we built critical workout features that coaches needed. However, we also added features that didn’t lead to conversions like Pods – ability to track multiple player workouts with a single device vs. a one player, one device before. Coaches were really impressed with Pods and it led to several trials, but not to conversions.

Body Boss Pods on the tablet and smartphone
Why didn’t Pods or other great features not lead to conversions? Simple – the coaches never got to the point to use Pods.
What we built and why we built, is what entrepreneur Joshua Porter calls the “Next Feature Fallacy” (see: The Next Feature Fallacy).
In retrospect, the major hurdle of user/ coach engagement was building a workout program. We had improved the experience several times since v1.0; however, most fixes were band aids, and didn’t solve the problem.
So to use the new Pods feature, coaches had to build a workout program. Except, if coaches were having issues building a workout program, then they never got to Pods. 
Instead of building new features like Pods (a nice-to-have), we should have focused our efforts on user experience and helping coaches get started with Body Boss. Once we got coaches using the system, we could then track engagement metrics and tested the adoption of features like Pods.
What else could we have done to address the engagement issue? How have you developed features that consistently added value?
At Body Boss, we built features on feedback that coaches would buy and be more engaged, but we didn’t see upticks in conversions once features were built. Instead, sometimes, the best customer discovery occurs when you’re actually testing an MVP – minimum viable product.
I’ve been working with several startups since Body Boss and each claim to be building an “MVP”. But instead, they’ve overbuilt their products adding complexity in features and user experience.
From these “MVPs”, I’ve noticed common trends leading to poor adoption and significant rework:
  • Developing an MVP in silo. By nature, entrepreneurs believe they know the “right way” to address a problem, so they starting building their vision. However, the right way may only address the problem for a few versus a mass market. Building an MVP alongside customer-partners from the beginning mitigates risks of missing bigger opportunities or building unwanted features.
  • Inability to adapt hypotheses and approach. Entrepreneurs can be extremely bullish in their beliefs of what is right, resisting the pull of the market. This can be a terrible trap where the market isn’t listened to. If they aren’t heard, they won’t buy.
  • Focusing on one side. In startups with two markets (think: Uber, Airbnb with supply and demand), it’s hard to successfully recruit one market without the other. There is no “chicken” or “egg” in priority anymore. Yet, I’ve seen too much effort focused on one side, while the other is ignored.
  • Building too much, too soon. A startup should evolve as the market evolves and matures. However, many entrepreneurs try building their visions of grandeur on Day 1. As a new startup, there’s a high level of education for the market and low degree of trust. Building too much early on can overwhelm consumers (bad experience!) and potentially dilute the startup’s value proposition.

What are your thoughts of customer discovery via an MVP? What trends have you seen when building an MVP? How have startups over built MVPs that you’ve seen and the problems that have come about?

Recently, I had the displeasure of telling our Body Boss customers we were shutting down August 31st. I’ve been dreading these calls since we zombified Body Boss as of April last year – see 21 Lessons from Failure and Moving On.
Thoughts on zombification and the calls…
  •  Zombification allowed the team to showcase as a portfolio piece for other opportunities. Though not a “success” like Facebook or Uber, Body Boss was a success in many other ways. Don Pottinger and Darren Pottingerare leading amazing startups today while Andrew Reifman is growing an impressive client portfolio with beautiful UI/ UX.
  • Zombification delays the inevitable. When you are no longer working on your product or business, the market will let you go like you did.
  • Little issues become big annoyances. During zombification, we all transitioned to other opportunities. However when bugs came up, they took time to reorient ourselves back to the code.
  • Be honest. My voice was noticeably trembling on every call. But given our honesty and trust we built, customers understood our position and were supportive of us with Body Boss and beyond.
  • Have a transition plan. We notified customers in May of the sunset in August so teams could continue using Body Boss during the off-season while finding alternatives. This was appreciated.
  • Speak in-person/ on-phone. The partners who have stuck by us deserved our time. We spoke to our top partners on the phone, and resorted to email for scale.

I was scared to make the calls; however, they went well, and each call showed why I love building great products and brands… that is, we had real fans. Each call was a moment we could take pride in – hearing how much our product was loved and support moving forward. We created that from nothing but an idea…

What are your thoughts on leaving a company, product idle (“zombified”)? How would you handle sunsetting the business including notifying customers and other partners? What would make transitioning easier for you as a customer?
I met one of the co-founders of a Chattanooga-based startup recently whose company is on a growth TEAR. The company launched two years ago, and have grown to 65 full-timers and 30 part-timers with annual revenues approaching $10MM. Two years… yowza!
With such fast growth, I was curious what were his top lessons and tips he’s learned. Naturally, I asked…
  1. Treat supply and demand the same. The startup follows a model more recently popularized by Uber – that is, they hire providers to perform a service, and they sell the service to customers. Thus, the startup actually has two markets to address. Most people understand that brands must focus on customer experience, but with their model (and like Uber’s), they must also focus on the service providers. The service providers are an extension of their brand, and thus, it’s important to ensure the service providers are taken care of and heard from.
  2. Clearly establish roles at the beginning (amongst the founders). I surmise there might have been issues early on when one co-founder worked on the startup full-time while the other worked part-time. Though, I’m unsure what he meant by “roles” here. At least when it comes to duties, early employees (founders included) wear many hats. Instead, I believe he was referring to a hierarchy of sorts. In my experience with Body Boss, one of the lessons learned was the importance of some level of hierarchy to fall back on when decisions reached an impasse. The four of us co-founders had equal equity, equal authority, and without a clear leader, we could (and we did) spin our wheels on decisions that were evenly split.

It’s always great to hear about rapid growth companies, and learn from their founders.

What are your thoughts on ideas and innovations that must address two markets? What are your reservations about hierarchies vs. flatter organizations?