The shortcomings of SAFE notes (simple agreement for future equity) are coming home to roost; ironically, entrepreneurs are paying the price. Y Combinator invented the notes with a noble goal: “we intend the SAFE to remain fair to both investors and founders.” But many SAFE notes that entrepreneurs are quick to issue now have a nasty bite: much more dilution than the issuers thought when they signed those documents offshore company registration in hong kong.

 

Since the SAFE was created in 2013, many optimistic entrepreneurs have flocked to raise successive “mini-equity-rounds” using the SAFE format or traditional convertible notes. Little thought is given to the potential impact of these notes on future valuation, and their dilution implications are often overlooked. This can be especially appealing when raising individually small checks from unsophisticated angel and seed investors. And it can be a poisonous recipe serviced apartments in hong kong.

 

We have observed the following in our own recent direct experience investing in SAFE and convertible notes: that many founders have a tendency to associate the valuation cap on a note with the future floor for an equity round; that they further assume that any note discount implies the minimum premium for the next equity round; and that many founders don’t do the basic dilution math associated with what happens to their personal ownership stakes when these notes actually convert into equity.

 

By kicking the valuation can down the road, often multiple times, a hangover effect develops: Entrepreneurs who don’t do the capitalization table math end up owning less of their company’s equity than they thought they did. And when an equity round is inevitably priced, entrepreneurs don’t like the founder dilution numbers at all. But they can’t blame the VC, they can’t blame the angels, so that means they can only blame… oops VPN Provider!