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Understanding SAFE Aggrement - No Equity & No Debt | AI’s $200B Question | VC Remote Jobs
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📢 Understanding SAFE Agreement: No Debt and No Equity!
If you're a startup founder looking to raise funding, you've likely explored different investment options like equity, various types of debt, and convertible notes. Typically, these options fall into the categories of equity or debt instruments. However, there's another choice, SAFE - Simple Agreement for Future Equity. Unlike traditional instruments, SAFE doesn't fit neatly into either the debt or equity category, and it doesn't involve accruing interest.
You might have heard of SAFE, but let me delve deeper into it to explain each term thoroughly. This way, you'll be well-prepared to approach investors and raise funds through a SAFE Note in the future.
Source: Google Images
SAFE takes the legal form of Compulsory Convertible Preference Shares (CCPS) which is convertible at a future Equity Pricing/ Valuation Round, dissolution, Merger & Acquisition, or at the end of 3 years from the date of issue, whichever is earlier
5 Different Types:
Fixed Conversion at a future date
Valuation Cap, no discount
Discount, no valuation cap
Valuation Cap & Discount
MFN (Most Favored Nation)
Let’s take a simple example:
Seed Round:
Let’s say SAFE Investor invests $25,000 with a $5m Valuation Cap, 20% Discount
Scenario 1: Series A:
Pre-money valuation of the company $10m
Number of Shares= 2m
Share Price= $10m/ 2m= $5
Option 1:
SAFE Investor Choosing Shares at 20% Discount
Share Price= $5*(1-20%) = $4
SAFE Investment= $25,000
Total Number of Shares = $25,000/ $4= 6,250
Option 2:
SAFE Investor choosing $5m valuation cap
Share Price= $5* ($5m Valuation Cap/ $10m pre-money valuation)= $2.50
SAFE Investment= $25,000
Total Number of Shares= $25,000/ $2.50= 10,000
SAFE Investor will apply the Valuation Cap option; which would convert at $2.50/ share.
Finally, the total number of Shares for SAFE Investor= 10,000
Share Price at Series A $5
Share Value of SAFE Investors= 10,000*$5= $50,000
SAFE Investment= $25,000
Unrealized Return= (($50,000- $25,000)/ $25,000)* 100%= 100%
Scenario 2: Series A:
VC Firm Invests at a Pre-Money Valuation = $6 Million
Total number of shares 2m
Share Price= $6 m/ 2m= $3
Option 1:
SAFE Investor Choosing Shares at 20% Discount
Share Price= $3*(1-20%) = $2.4
Total Number of Shares= $25000/ $2.4= 10,417
Option 2:
SAFE Investor choosing $5m valuation cap
Share Price for SAFE Investor= $3* ($5 Million Valuation Cap/ $6 Million pre-money valuation) = $2.5
Total Number of Shares= $25,000/ $2.5= 10,000
SAFE Investor will apply the Discount option; which would convert at $2.4/ share.
Total number of Shares for SAFE Investor= 10,417
Share Price at Series A= $3
Share Value of SAFE Investors= 10,417*$3= $31,251
SAFE Investment= $25,000
Unrealized Return= (($31,251- $25,000)/ 25,000)*100%= 25%
The higher the Valuation Cap in the iSAFE round, the better it is for the Founder, resulting in a lower dilution of Equity provided the Founders are confident to close the next round at a higher than the valuation cap.
MFN Clause:
Let’s say SAFE A has an MFN Provision.
If a new SAFE B is issued, the company has to tell SAFE A about it.
If the terms of SAFE B are better for the investor than SAFE A, then SAFE A can ask for the same terms as SAFE B.
That’s it, I hope this helps you to understand the SAFE Note. If you need the Excel template that we used here. Join our community and get access to our resources.
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📢 Featured Article: AI’s $200B Question By Sequoia Capital
I have come across this interesting article - “AI’s $200B Question” where they mentioned that GPU capacity is getting overbuilt. Long-term, this is good. But in the short term, things could get messy. So sharing the summary and my takes on this article.
“In the fast-paced world of AI, the recent surge in Generative AI, spurred by Nvidia's impressive earnings, has shifted the industry into high gear. Notable consumer launches like ChatGPT, Midjourney, and Stable Diffusion, alongside Nvidia's success, have ignited massive investments in GPUs and AI training.
Source: https://www.sequoiacap.com/article/follow-the-gpus-perspective/
However, a critical question looms:
what's the end goal for all these GPUs? Who benefits, and how much value needs to be created to justify this frenzy?
Consider this: ‘For every $1 spent on a GPU, $1 must be spent on energy costs. With Nvidia's projected $50B GPU revenue, it implies $100B in data center expenses. Plus, end users like Starbucks, Tesla, and others need to earn a margin, making the total revenue requirement astronomical. Much of this expenditure comes from tech giants like Google, Microsoft, and Meta, raising concerns about whether these investments align with genuine customer demand or are speculative.’
Although companies like OpenAI, Microsoft, Google, Meta, and others are generating significant AI revenues, there's still a substantial gap to fill. This creates a massive opportunity for startups to innovate and create genuine value for end customers. The focus needs to shift from infrastructure to creating products that people love, use daily, and are willing to pay for. With the infrastructure in place, the challenge now lies in harnessing AI's power to change lives, emphasizing customer satisfaction as the key to success.”
If you want to read the full article - here is the link.
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