This content was created by Tim Draper. This content was uploaded by Tim Draper. This is a YouTube video titled "What Are SAFE Notes? | Favor & Sunroom CoFounder Ben Doherty" (posted 2019-01-23). The excerpt is a live Q&A / discussion between at least two participants (including Ben Doherty as the featured co-founder) covering startup fundraising topics: how SAFEs work (caps vs. discounts), how to calculate conversion/ownership, bridge/convertible notes vs. SAFEs, bank business loans, and guidance on when to take venture capital (product–market fit, dilution, growth needs). The speaker also references sharing a follow-up list of questions via a colleague named Kevin.
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Go ahead.
I was just going to say, right now I'm going through the process with an investor. I'm having a little trouble, I guess, figuring out the SAFE note. Because I know at the top it's like a percentage of equity, or is it a percentage of the valuation? So how— what are the specificities of that valuation?
Yeah, so you were saying you're having some issues just using the SAFE note? So there's really only a couple different variations of SAFE notes. You can, pretty much all of them use what's called a cap, which is basically just you're setting the valuation, right? Now there's lots of details, and I'm sure some lawyer would say, oh, well there's all these million other things, but the reality is the way it actually works is whatever that cap is, that's generally what the actual money will convert into and turn into equity in the future.
The cap.
The cap is the only thing that matters. There's sometimes like a discount, which means they would get a percentage off whatever the round's valued at, but no smart investor will actually sign a SAFE without a cap. No one does. Back in the day we called it uncapped notes. People don't really do that. So just think about, forget it, the discount's not that important unless you're like, it's just The thing that matters is the cap. That's what sets the valuation. For me, I keep it really, really simple. I literally just set a cap, which is like everyone understands, that's the valuation. And then however much money people put into the valuation, you just do the math on that and that's how much percentage they get. Does that make sense?
That's like the maximum percentage they could get out of their investment?
Yeah, I mean, I'd have to look at your thing specifically, but It would be just however much money they're putting in divided by the valuation. What's the take-home on bridge notes?
What'd you say?
Bridge notes. Bridge notes? Oh, that's just a convertible note. I mean, you can just use SAFEs to do exactly the same thing with less risk because you don't owe the money back. A business loan?
Yeah.
So yeah, his question is, what about getting a business loan from the bank? So it's really hard to get a business loan from the bank unless you already have a business that works. So yeah, if you have a business that works and you can loan against it, a bank will give it to you. But a bank, they don't— it's hard to raise money, it's hard to get money from a bank at a decent interest rate unless you actually have a business that's working. I think I have like—
oh, go ahead. I'm wondering how do you know it's the best time to accept venture capital money, and how do you tell it is a suitable risk for the business?
Yeah, so the question was, how do you know it's a good time to take venture money? I think it depends on, I honestly think it depends on how close you are to product market fit and how comfortable you are giving up a percentage of your company. Yeah, I think it's highly individual. If you can sleep under a desk longer and eat ramen noodles and live without eating one meal a day, more power to you. Because then you can survive longer without giving up a percentage of your company. Now once you get beyond product market fit and you start having a business model that works, then it's like, okay, how fast do I want to grow? Is really the question you're trying to ask. So they're entirely 2 different questions depending on what stage of the company that you're at. Oh, how do you tell if a VC is suitable for you? I didn't actually have enough time to go over that. I have like 10 questions to try to figure that out. And maybe what I could do is just send that around to Kevin and maybe he can share that with you guys afterwards. Because I think we're running out of time. But yeah, I have a ton of questions to try to break that down. And I can send it over to Kevin and he can share it with you guys. Yeah, wish I had more time.
