1/13/2024 0 Comments Safenotes proSo - what’s the problem? What are you getting at?įrom “Why Your Startup Should Eat a Debt Sandwich” “Founders are often given valid but over-simplified advice when it comes to debt financing. Accelerators use them because they are a practical and efficient way to fund hundreds of companies quickly.Angels and early investors love the caps that ‘protect’ them for the substantial early risk taken.Founders love them because they are quick, easy and don’t require a formal closing and are perceived to have lower legal costs.There is broad acceptance that SAFEs (or convertible notes) work well for early funding and for accelerators like YC or Techstars for myriad reasons. The renewed discussion around all of this has turned into a great catalyst to revisit our very popular Debt Sandwich article and to share some of our deeper thinking on two topics: The preference most founders have of using SAFEs (or any convertible debt instrument) as the sole financing vehicle for their startup until a “favorable priced round makes sense ” and, diving deeper into what we call the ‘Debt Sandwich’ strategy when it comes to long term fundraising. One group is willing to pay up and the other is less price sensitive…and so here we are. New investors have motivation and eagerness to deploy capital and experienced ones sitting on bigger pools of capital have leverage and understand the arbitrage and power law realities of early stage investing. In this kind of environment, it’s easier for companies to get away with delaying raising a priced round for longer. Up until now (Q1 2022), we’ve been in a bull market with tons of dry powder, many new/first time VCs and lots of capital to be deployed. We hear this constantly - the idea that not pricing a company until it's a rocketship is the way to go, that it helps minimize dilution, etc. In essence, it’s a ‘lowest-possible cap’ note that incentivises founders to take the highest valuation deal they can, or to delay raising an equity round until they are “crushing it”. The YC uncapped note is a bit of a smokescreen, which is to say that it seems like a great deal largely thanks to the MFN (Most Favored Nation) clause. Note: Before we go any further, please note this post is really about how to avoid pitfalls and risks associated with raising successive convertible debt rounds, not about YC’s deal specifically, but we thank them for giving us a reason to discuss it. On the surface this may all look great for founders and for YC, but in reality there are some major problems that, as usual, will only show up later. Some founders will salivate at the idea of a bigger check with super favorable terms from YC. It's causing headaches for pre-seed VCs, downmarket accelerators and Angels. There has been no shortage of hot takes on YC’s new ‘Uncapped SAFE’ deal and what it means for the early-stage founder and venture community. When is a SAFE not so safe? Or, when does ‘Uncapped’ actually mean the opposite?
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |