I've talked before about how using convertible
securities as a funding approach is something that
can sneak up on you when it comes to the
dilution impact, when you do a priced round
and suddenly there's a lot more dilution there than
you thought you'd have.
Today we'll walk through a post-money SAFE
spreadsheet so that you can analyze up to
five different post-money SAFE investments
to see what the impact will be on the founder
share dilution.
Hi, I'm Steve Morris and I use this StartupSOS
channel to provide practical how to advice for
first time entrepreneurs.
So today it's the Post-Money SAFE, a spreadsheet for
analyzing your dilution.
We'll use as our example, the example they use
in Appendix 2 of Y Combinator's QuickStart
Guide for the Safe.
There's a link in the notes where you can download
that document so you can follow through and actually
experiment with those numbers that you see in the
example in the actual spreadsheet.
Of course there's a link to the notes to download the
spreadsheet as well so you can plug in your
own numbers.
Now, we've talked before about how there are many
ways to convert convertible securities
into stock, some more favorable to founders
and some less favorable.
Here are the key assumptions that underlie the
approach taken by Y Combinator in their QuickStart
example. First of all, they assume there'll be a
fixed number of unallocated options
at the end of the round, and in particular, they
assume that's 10 percent of the company.
They also assume that at the end of the round, the
Series A investors, which includes the
pro-rata investment from
any of the SAFE investors might have, that that is
a fixed percent of the ownership.
And again, in the example, it's twenty five percent.
So they're going to kind of markup the series A
shares to get to that 25 percent.
So they're not diluted by
the investment from all of those SAFEs that are
converted into a stock.
And finally, the post money SAFE round
is actually getting diluted by those new
options that are being issued as a part
of this round that are going to net out to 10 percent
of the company at the end of the round.
Now, one of the investors in the example, one
of the SAFE investors, has a pro-rata right,
which means they have the right to buy additional
shares, presumably to maintain their
investment percentage. Now, the investment percent
they had in the in the SAFE round was 10
percent. So they get to invest more.
However, although they get the right to
buy 10 percent of the Series A round, the assumption
built into Y Combinator is model is
that all of those options that get issued do
dilute the SAFE round,
the stock that they bought during the safe rounds.
So by the end of it,
that particular safe investor does not own 10 percent
of the company.
They own just over 9 percent of the company.
Because, again, the stock they got is part of the
safe ground gets diluted by
the option pool.
Let's start with a pre investment cap table for the
company, assuming that the founders have about nine
point two five million shares of stock.
There are six hundred fifty thousand shares in an
option pool that's committed for a total of nine
point nine million and another one hundred thousand
shares allocated for options that are not yet
committed to anyone.
So that's a total of 10 million shares
of stock before any investment occurs.
So do the math. And the founders own little more than
ninety three percent of the shares before
the investment round. If you just look at the actual
issued shares. But if you take into account
the fully diluted shares i.e.
the one hundred thousand shares that were issued
or at least allocated, but not issued, not
committed yet, then they have about ninety two and
a half percent of the company.
And then of course they take on some SAFE investment.
In this example, again, the example that's covered in
Y Combinator's QuickStart Guide, there are two
investments from to post money SAFE investors.
The first invests two hundred thousand dollars with a
post money cap of four million dollars.
The second invests eight hundred thousand dollars
with a post money cap of 8 million.
We're assuming that there aren't any discounts that
come into play here.
And so bottom line, the first investor
is going to, at the end of the safe round, own 5
percent of the company, and the second investor will
own 10 percent.
And we further assume that the second investor, the
larger investor, is given a pro rata right,
which means them in the Series A round.
They have the right to purchase additional shares
to maintain their percentage ownership.
And then they get an
offer for a series, a investment.
So the assumptions behind that are $15 million
pretty money value, a 5 million dollar investment,
znd the investor C which
would be the lead investor is investing 4 million of
that. The rest of the investment will be
from other investors and of course, the pro-rata
investment from that one SAFE investor
with a pro-rata, right.
They're also requiring, as I mentioned before, that
10 percent of the company's shares
be allocated to an uncommitted
stock option pool.
Now, the implication is if you look at their
investment of 5 million total and the pretty money
of 15, so the post money value is going to
be $20 million.
Five million is 25 percent of that.
So what they're requiring is that at the end
of the round the Series, A, investors are going
to still own 25 percent of the company,
even though there's all that SAFE money that
also is going to convert to stock.
How do we figure out what the end of the
round looks like? Well, first of all, we're going to
start with the SAFE round, treating the
SAFE itself as its own separate
round. So to figure out what the SAFE ground looks
like, the challenges, we have to figure out
what the price is going to be for
the stock in the series A.
The reason is that until we do that,
we don't know whether it's a better deal for each
safe investor to get the price implied by their
post money cap or should they get
the price implied by the Series?
A If the Series A deal is a better deal,
they'll get that price.
So to be sure, you have to calculate that and then
decide the price and then you'll know how much stock
each safe investor gets.
So how do we do that?
Well, we talked in the last video about the challenge
being that this is an iterative process because
the price determines the total number of shares
and the total number of shares determines the price.
It's circular. So the challenge is
you get to iterate to figure out what that is.
Now, where do you start?
Well, our starting point here is one point two
seventy five dollars per share.
Where did that come from?
Well, we get there by assuming that the post
money cap is the thing that will determine the best
price.
May or may not be true, but it'll at least be close.
Then we can actually calculate what the
total number of shares is and come up with a share
price. We simply look at
what percent of the company the
safe investors get, compare that
to the total number of shares that we begin
with from the the founders and the option
pool. And you look at how many additional shares
you'll have to issue then for the safe investors
to get the percentage that they'd been promised.
So, for example, like in this case, the SAFE
investors have been promised a total of fifteen
percent of the company, where you take the total
number of shares owned by the founders and
already allocated for options, and you
divide one minus
point one five into that to determine
the total number of shares that you have to have to
make room for that fifteen percent for
the SAFE investments.
So that gives you a pretty good estimate of the total
number of shares and you simply take your pre money
value, divide those shares into it.
And that gives you a dollar per share number that's
going to be close, but it's going to be too high
because you know that more shares will be issued.
You've got options to issue.
You've got shares to be issued for the Series A
investors.
So, you know, there'll be more shares and hence the
price is going to be lower.
But this gives you a good starting point.
What the spreadsheet has, just like the spreadsheet
we went over in the last video, is a place
where you can enter your guess.
You're iterated guests at a price.
And the spreadsheet shows you what the implication is
then for the percent ownership of the Series A
investors.
As you can see, when you plug in the
$1.275 price, the Series A ownership
is lower than it needs to be.
It needs to be 25 percent and
it's less than that. So you know that you have to
have a lower price.
Now, if you tweak and experiment, slowly
lowerinig the price, what you'll find is
$1.1144 gives you at least up to four digits of
accuracy, the right 25 percent
for the Series A investors.
Now that we have the price, we can figure out the
right number of shares for the SAFE investors.
We start by simply looking at how
much they would get, assuming that the they get
their percent guaranteed in the SAFE.
So we use that totally diluted number of shares,
apply their percentage to it, and these are the
numbers we come up to. $588 thousand
for the A investor and twice that for the B
investor. Given that and given how much
they've invested, we can do that division and figure
out the share price that they would be paying in that
scenario. So that's 34 cents and
68 cents, respectively.
Now, in both cases, that's a better deal
than the series a price, which is over
$1, so that will be what they pay
the SAFE price, not the Series A price.
There's a couple more columns there.
You can see it talks about the shares converted
in the Series A Price.
Well, in this scenario, no shares are converted
in the Series A price.
So those are all zero.
Next column talks about what percent of
those that do convert to stock will be converting
at the SAFE price.
And then there's a total there at the bottom showing
it's a total of fifteen percent.
So why do we have the last two columns there?
They seem pretty boring.
Well, those are there for the scenario that
some of the SAFE investors might be better off
in paying the eries A price
instead of paying the price that they get from their
post money cap.
There is, in fact, in the Y Combinator write up a
second scenario where exactly that happens.
The pre money instead of being 15 million is eleven
million. And in that scenario, the safe B investor
is actually better off going with the Series A price.
They get more stock that way. So that's what they'll
do. So the way the spreadsheet works
is those investors that are getting Series
A pricing are listed in that second
to the last column.
And those that are getting the
SAFE pricing, their percentage
is shown in the last column.
So to figure out the fully diluted number of shares
in the Series A round, what we can do then
is take the Series A price, figure out how much
stock goes to the Series a.
That's easy. The price divided into how much they're
investing. Figure out how many
shares will go to those SAFE
investors who are paying the series
a price. Well, we know how much they paid.
We know the series a price so we can figure out their
amount of stock.
Now we have the total capitalization
except for the 10 percent for the option pool.
And however many percent from
the last column that we have to allocate
to the SAFE investors.
Let's say it was 10 percent for the option pool and
maybe 5 percent for the investors that
that actually paid the SAFE price instead
of the Series A price. So we take all of
that other stock divide, one minus that
percent, and then we have the total
capitalization for the company, kind of a roundabout
way, but that gets you to the right number,
even if some of your safe investors are
paying the Series A price instead
of paying their SAFE price.
So again, if you plug in the numbers for that second
example Y Combinator goes over in terms
of the $11 million pretty money, you'll see how
that gets reflected in this part of the spreadsheet
and how that affects the next table, which
shows the actual number of shares.
And here it is. So again, the founders have their
nine point two five million shares.
We calculated the amount of stock that goes to the
safe investors and we know how
much stock was in the options pool.
So you can see that now our founders have about 78
percent of the company.
And that's just after the SAFE ground, after
all of those SAFE dollars, convert to stock.
Now we're set to do the actual investment
of the Series A. So here are all the calculations
that were behind that earlier point in the
spreadsheet where you were iterating the price and it
was estimating the the percent of the Series A.
Given the Series A price that you
plugged in, it calculates the total number of shares
that are going to the Series A.
Then it calculates the pro-rata
for any of the SAFE investors who
get a pro-rata right.
In this example, that was just the B investor
that got 10 percent.
And so their parada right is 10 percent
of that Series A number.
Going down the list, there were no other pro-rata
rights, so that means there's just barely
over 4 million shares available
for the other Series A investors.
In other words, the original number four point four,
eight, six million minus what had to be
allocated for the pro rata.
Adding all of that up, the total number
of shares that we've taken into account so
far is just over 16 million.
So now the question is how many options
do we have to issue so that there are
a total of 10 percent of the total
capitalization of the company in the option pool?
Well, again, we've done this calculation before,
the number is 10 percent. So you take one minus that
10 percent or point nine and divide that
into sixteen point one million.
Subtract out the sixteen point one number and one
hundred thousand shares of uncommitted
options. Keep in mind, there were already
100,000 shares of
uncommitted options available.
That tells you how many new options you'll have to
issue. After issuing those
1.6 9 million new shares, there'll
be more like 1.79
Million shares actually available for the option
pool. And that finally gets us to our fully
diluted number after the Series A of
just over seventeen point nine million
shares. So here is what our count tip looks like
after the round is all done.
Again, we talked about how many shares the founders
have. We calculated the shares that go to
the SAFE investors.
Note that for the be B SAFE investor,
that includes their their base shares from the SAFE
around, plus their pro-rata number of shares.
And then the shares for the Series A big investor
that did 4,,000000 and the other Series A
investors that invested the number that was
remaining. And again, we've got the
650,000 options there. So what does that mean for our
founders? Well, they end up with about 57
percent of the company if you look at just the total
committed outstanding shares.
But if you look at the fully diluted number.
In other words, you add in all of those options
that are now available and their ownership goes down
to 51.54%.
So even though you did a Series A
round where the initial numbers were that
the investor was going to own 25 percent
of the company after the round, given
the pre money value, how much money they put in
and the post money, you obviously
sold a lot more than 25 percent of the company.
The founders now really only have 51 percent.
And that's a good example of how all of that
convertible security money can
creep up on you and cause quite a bit more
dilution. Really about double the dilution
that would have resulted from just the original
Series A investment without the SAFEs involved.
Now, one other thing worth mentioning.
If you're comparing the spreadsheet numbers to the
write up from Y Combinator in
their QuickStart guide.
I'm showing here at 1.794
Million shares in the option pool.
And their numbers show
1.795. They've rounded it up about 400
shares. We're in agreement out to four decimal
places. I think we can write that off two to a
rounding error. Why they rounded it up I'm not
sure, but I think this is probably
close enough.
And if anybody is aware of why there's
a discrepancy there, why Y Combinator,
use the 1.795 I'd love to hear it.
But I do believe that the calculations in this
spreadsheet are correct.
At least until somebody points out otherwise.
So that's a fully deluded
17.946 Million shares.
And our founders are down to
51.54%. And you now of course
can download the spreadsheet and experiment with
five different post money SAFEs and see
what impact they might have on your
dilution. That's it for a discussion of the post
money SAFE share dilution spreadsheet.
I hope this was useful.
Hope you find the spreadsheet to be useful.
And if it was useful, please click the like, share,
comment. And if you haven't subscribed yet, please
hit that subscribe button and click on the bell
so you'll get notified when we have new videos
because there are always more coming up.
One that we'll have coming up is yet another
spreadsheet where you can analyze a combination of
convertible notes, pre money SAFES and
post money SAFEs, since that certainly happens
in the real world where you get a mixture
of different instruments because different investors
actually have different preferences as to what type
of investment they'd like to make.
Be sure and stay tuned for that.
All of these videos on dilutions spreadsheets will be
going into a play list.
There's a link to that right below me so you can
keep up with the entire thing.
That's it for now. Thank you very much for watching.