[paul]

It's really not that hard to understand how these notes convert and how much you are diluting if you spend just a few minutes modeling it out with https://angelcalc.com

Of course it's still possible to get more dilution than expected if you raise at unrealistically high caps (or uncapped!) and convert at a lower valuation down the road, but even that is probably less painful than a conventional down round.

[ravibala1]

Agreed. We walked all our angels through a 3 scenario (low, goal, home-run) Series A pre-money valuation analysis using a calculator. Bit overwhelming for some but everyone appreciated the effort.

The biggest benefits of the note structure to us were a) Rolling close b) Not wasting time debating "valuation" when neither us nor the angels were capable of estimating a number with limited to no data.

[jon_richards]

How does a safe prevent you from debating valuation? It seems like a safe note with no discount is rarely a good deal unless you hit the valuation cap (why not just wait until A otherwise?), and if you do hit the cap it's essentially equivalent to investing in a round priced at the cap (a little worse due to preference caps).

In what way is the cap not a "valuation"?

[dankohn1]

The argument for a seed investor to invest in a SAFE note with no discount and no cap is that the Series A round will be priced by a VC or superangel, and the seed investor will not otherwise have the opportunity to invest at that later point. That is, the seed investor is trading the opportunity to participate in an investment at all for control over the exact terms. But since neither the entrepreneur nor the seed investor have any idea what a pre-revenue company is worth, they're often fine delaying the valuation question.

[ravibala1]

So we raised on a convertible note with a cap and a discount. We're from the east coast and our accessible angel pool balked at SAFEs. An argument for a different thread :-).

I'd defer to Paul's point that choosing a too high (or non-existent) cap makes no sense. We did have to negotiate our cap and we set it so that we had a realistic shot of hitting 2-3x that in Series A pre money which in my mind is why an angel should be investing. I'd personally consider it a disappointing outcome if I raised at my cap and I'd hope my investors would as well.

A cap is not a valuation and I agree that everyone thinking it is, is a problem.

[rgbrgb]

>> why not just wait until A otherwise

1) For a VC: more performance info / better access to the A.

2) For an angel: most angels won't have access to the A, so seed rounds are their chance to invest early in a potentially VC track company.

[sandGorgon]

>Not wasting time debating "valuation"

+100 on this. This is particularly problematic in India where most early stage investing is priced. The opportunity to bully founders to accept weird valuation terms is limitless.

notes are a trade-off of current capped valuation for future capped dilution. Guess which one gets misused by investors ?

[platosrepublic]

Yeah, I've never heard a founder regret using a SAFE because of the confusion.

Mysteriously, the only people who oppose SAFE notes are investors who would like you to instead enter a complex negotiation with them!