Month: March 2019

Differences between SAFE and Convertible Notes

Differences between SAFE and Convertible Notes

Investment

With convertible notes slowly becoming a thing of the past, in recent years startups are beginning to embrace Simple Agreements for Future Equity (SAFE) as an alternative to raise funds. Despite being similar as both are tools for raising funds, there are many outstanding differences between them and we will dive deeper into them in this article.

What are Convertible Notes?

Convertible Notes

According to FundersClub, convertible notes are an investment that is structured similarly to a loan. A convertible note is a type of debt which might convert into equity in the future. Debt, I’m sure most of you out there are familiar with this term, if not put it simply — When I borrowed money from you, I have to pay you back in the future, but with interest. A convertible note is a type of debt but slightly different as instead of paying you back with interest in the near future, we change that into equity and offer you part of the ownership. Sometimes we like to call convertible note debt-like since it’s similar to debt with slight variations.

What is SAFE?

SAFE

SAFE was introduced by the Silicon Valley accelerator Y Combinator as the new big boy in town for startups to have more options, or even to replace convertible notes when it comes to raising capital. To put it simply, SAFE is a warrant to purchase a stock at a later priced round, and hence is basically a contract. The main difference SAFE differs from convertible notes are maturity date, interest rate, and conversion to equity.

Maturity Date

Maturity Date

While SAFE is not a debt and hence does not have a maturity date, convertible notes do have a maturity date.

Upon reaching the maturity date, entrepreneurs face tough decisions on whether to pay back the principal of the convertible note, with interest or convert the debt into equity for the investors. Most would opt for the latter option as paying back the principal amount with interest could be difficult for startups, especially at an early stage.

Interest Rate

Interest Rate

As discussed earlier, since SAFE is not a debt, but a warrant/contract, it does not carry an interest rate hence keeping things simple and founder friendly. While SAFE does not carry an interest rate, convertible notes, on the other hand, carry an interest rate (simple and not compounded) between 5–8%.

For example, if the interest rate was 5% in a $100,000 convertible note seed financing and Series A funding round occur a year later, the investors would convert an additional $5000 ($100,000 x 0.05).

This may not be considered important for a short-term investment but may create financial problems if it’s long term and since there is maturity date for convertible notes, this might post as a bigger problem to entrepreneurs. The interest rate, however, could be a way to incentivize startups to raise rounds on a timely basis. That being said, there is a maximum interest rate that may be charged on a loan depending on which state, this is known as Usury Laws by State.

California for example (for obvious reasons), according to Law Office of Melissa C. Marsh, ” Pursuant to California law, non-exempt lenders (the average individual) can charge a maximum of: (i) 10% interest per year (.8333% per month) for money, goods or things used primarily for personal, family or household purposes and (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year, or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the date the loan is contracted for, or executed. In other words, the general rule is that a non-exempt lender cannot charge more than 10% per year (.8333% per month) unless there is an applicable exemption”.

Conversion to Equity

Conversion to Equity

While both SAFE and convertible notes do offer a conversion into equity, there are differences since they do not call for the same terms of conversion.

SAFE only allows for conversion into equity at the next round of financing. Meaning, if you decided to opt for SAFE during the seed round, conversion into equity option is only available the following round, meaning Series A round. Hence SAFE does not carry a multitude of conversion events.

Speaking of which, I almost forgot to mention during the next funding round, SAFE can be converted even when you raise any amount of equity. Many have argued that SAFE is very easily manipulated because, without minimum amount raised to trigger conversion, you could simply raise $8000 the next round and trigger the conversion.

For convertible notes, besides allowing a conversion during maturity, it does have an option to convert at the current round, and future round. Also, a conversion would take place when the minimum amount (reflected on the agreement) is met.

For example, assuming investor invested $200,000 and were granted the right to convert to equity at a $2 million valuation. If the start-up were then acquired for $10million, the investor would receive $1 million or 10% of the proceeds, by converting the $200,000 loan into equity representing 10% of the issued and outstanding equity, post-conversion ($200,000 divided by $2 million + $200,000).

What’s the Best Option for Seed Investment?

Seed Investment

So, after diving into the 3 main differences between SAFE and convertible notes, what does that mean for all entrepreneurs out there? For my take, SAFE is made simpler for entrepreneurs and they can use SAFE to raise capital with ease without having to go through the trouble of negotiating maturity date and interest rate terms, and also clarify when is the next funding so as to trigger the conversion. SAFE does indeed align the interest of investors and entrepreneurs in a whole new different way. That being said, always remember that what might be a pro to one start-up could be a con to another and hence depending on the nature of your start-up, choose wisely. Are you a startup seeking funding during Seed or Series A? Check us out here!

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About VenturX

VenturX is a web platform that helps entrepreneurs through their journey from idea to launch and beyond. VenturX uses data-driven analytics to score and connect startups and investors at Seed and Series A financing.

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Networking in Silicon Valley

Networking in Silicon Valley

Silicon Valley

Silicon Valley

There is a stigma that people in Silicon Valley are not like anyone else. From my time living there and then going back a few years later, I learned these tips about the how to formulate a simple networking goal, what questions to ask and how to get ahead of the game! I decided to write this article because I was scratching my own itch. It was something I wished I could find more info.

Questions to ask when you meet an investor:

1) Their favourite question of mine seemed to be: “If you only one day left in San Francisco, what would you recommend?” If you feel pride and joy about your city, it is something that would bring your thought back to happy memories that you would recommend to newcomers.

2) General questions about their work: What is your investment focus, what is your average investment size, etc..

3) What are you hoping to get out of this event?

4) How is your current firm different from the last VC firm you were at? (This is a great question for those who changed firms, which does happen a lot.)

5) Offer them something instead of ask for something.

Tim Ferriss made this great video about how to ask questions. Why would this be a good source? He is from San Francisco himself and he is an elite podcaster. Podcasters are trained in their craft to do one thing — ask good questions. His key insights are:

a. Ask questions that are easy to answer. Instead of “what do you like to read?” change it to “what is the one book you give as a gift most often?”

b. Asking the right questions produces an interesting conversation. (he has a different way of saying it.)

See the full video here:

Formulate Your Networking Goal

Form my last article, “Do networking events contribute to your business goals?” I talked a bit about the importance of investing any time or money towards a networking even only if it helps you reach your business goals.

For any goal to be obtained, it had to be: measurable, timed, and accountable.

When I attended the TechCrunch event in February 2019, I had a goal of meeting X number of startups in investors in my industry. I only had 3 hours at the event. I was accountable to my friend who I will report to the following Sunday.

Even before I went to the TechCrunch event, two friends invited me to the Facebook campus for lunch earlier that day, so I was already in the mindset of achieving my goals. So, if there was any space for extra networking, I would make a new “Facebook” friend. Unfortunately, I did not have enough time at Facebook to make new friends.

How to get ahead of the game

· Add people to your LinkedIn beforehand with the note “Looking forward to meeting you the TechCrunch event tonight — Sydney, Founder of VenturX.” It is simple and short enough to fit in that introduction box LinkedIn gives. The reason for that is to get a small idea of who is attending and what their business is about (and if it relates to yours). Note: you can only do if you have newsletters or an email from the event organizer telling you who is going to be there. I received this list 2 days beforehand. (Estimated Time: 5–7 mins for 20–25 new contacts)

· Add attendees beforehand on twitter. If you are in a B2B business like VenturX, I recommend following their company twitter and check on crunchbase for the founder’s names too. (Estimated Time: 10 mins for 20–25 new contacts)

· When you get a strange request from someone you don’t know, I recommend saying hi and asking how you can bets work together. If I don’t know you and you send me a request, I will ask you that. (You can try and reference this article.)

· Thank new contacts afterwards for any tips or resources new contacts gave you. People always like to hear that their advice was helpful

· If you taking photos for company social media account as well, get there early and take photos. This is especially if your phone is slow. It takes 15+ minutes to find the wifi password, connect to wifi with my slow phone, think of hashtags, find the event hashtag, and think of my own hashtags/text, and take pictures. If you want to tag any sponsors/ people, it would take even longer.

In conclusion, networking events are great for face to face interactions so the person you are dealing with isn’t just another email to type.

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