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My Favorite Tips from Sam Altman’s Startup Playbook

Screenshot from http://techcrunch.com/gallery/y-combinator-startup-playbook/slide/42/
Last week, TechCrunchpublished 62 Tips from Y Combinator’s Startup Instruction Manual. It was written by YC’s President Sam Altman with some good quotes to ponder when doing a startup. I wanted to share my favorite Altmanisms:
  • “Today’s successful companies all started with a product that their early users loved so much they told other people about it. If you fail to do this, you will fail.”
  • “The fast you can develop self-belief and not get dragged down by haters, the better off you’ll be. No matter how successful you are, the haters will never go away.”
  • “The best ideas sound bad but are in fact good. So you don’t need to be too secretive with your idea – if it’s actually a good idea, it likely won’t sound like it’s worth stealing.”
  • “Founder need both rigidity and flexibility. You want to have strong beliefs about the core of the company and its mission, but still be willing to learn new things when it comes to almost everything else.”
  • “If you have a pre-existing relationship with your cofounders, none of you will want to let the other down and you’ll keep going. Cofounder breakups are one of the leading causes of death for early startups.”
  • “You want to start with something very simple – as little surface area as possible – and launch it sooner than you’d think.”
  • “You should not put anyone between the founders and the users for as long as possible – that means the founders need to do sales, customer support, etc.”
  • “Don’t fool yourself with vanity metrics. The common mistake here is to focus on signups and ignore retention. But retention is as important to growth as new user acquisition.”
  • “Find ways to get 90% of the value with 10% of the effort. The market doesn’t care how hard you work.”
  • “No first-time founder knows what he or she is doing. Ask for help and you’ll be better off. Find a mentor.”
  • “A successful startup takes a very long time – much longer than most founders think. You cannot treat it as an all-nighter. You have to eat well, sleep well, exercise, and spend time with your family and friends.”
  • “Competitors are a startup ghost story. First-time founders think they are what kill 99% of startups. But 99% of startups die from suicide, not murder.”
  • “The first check is the hardest to get, so focus your energies on getting that, which usually means focusing your attention on whoever loves you the most.”
  • “The key to being good at pitching is to make your story as clear as possible: mission, problem, product/ service, business model, team, market and market growth rate, and financials.”

What are some of your favorite tips from Sam or others? Any particular reasons?

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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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The Finance of Startups: For Dummies (Part 9 – Raising Funds through a Safe)

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?
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