[labaraka]

Q: What happens if the startup does well after the safe and doesn't need to raise any money and doesn't have a liquidity event? Are the safe investors stuck with a security which does not derive any economic (e.g., dividends) value and they don't have any control?

[clevy]

This is a high class problem to have! As mentioned above, this seemed to us to be an extreme corner case. To remain simple, we tried not to draft for every scenario (which was hard, believe me - lawyers do this by nature). It may require some patience on the part of the safe holder, but odds are that eventually a company will have a liquidity event.

[amirhirsch]

My company is in one of these corner cases where we haven't converted our debts but still operate with a small, but growing revenue stream. It's possible that I will be able to repay the debts with interest in 2-5 years depending on how well we invest revenues in growth and part-time development. I wonder if it isn't more beneficial for me to have the option of paying back debts from revenues and then use revenues to pay out dividends to shareholders and more beneficial for investors to be able to call on the debt when it comes due if the company has accumulated enough revenues. With a safe, both parties seem to lose leverage over the other. I realize that startups in my situation are probably already a write-off from the investors' perspective, so perhaps it's just cheaper to ignore them, but I could imagine a number of people raising $100K safes ending up with an app that makes $30K per year and investors just get screwed.

[wtvanhest]

What about the case where the business becomes a low growth, life style business. Is there any way to force a liquidity event?

[not_that_noob]

Not that I can see. So the it's up to the parties in that eventuality to work things out.

[jedberg]

> So the it's up to the parties in that eventuality to work things out.

That's usually a bad way to make a legal contract. As an investor I'd want something a little more definitive.

[EGreg]

Convertible notes convert into equity (either at the holder's or issuer's option) on the QFE - a Qualifying Financing Event.

Often that also includes certain revenue threshholds and/or time limits.

Does the "safe" have provisions for this?

[james_alonso]

but in the worst case with the convertible note, the investor gets their money back.

and often but not always, the note will also provide that if the note matures hasn't been a QFE, then the note can convert into common stock.

[logicallee]

EDIT: Below, I mean from the point of view of subjective valuation by investors of the different possible outcomes.

Nobody wants to have debt repaid when a company takes off that you could have had early stock in. (And normally I think that convertible debt doesn't allow such provisions.)

Losing the amount invested (investment going to zero) is really, subjectively, not the "worst case" - because it's money the investors could stand to lose.

Instead, subjectively, the worst case (and related to a common investor fear, FOMO, fear of missing out), is making the original and only seed investment that launches the next Snapchat (or whatever), and then getting failing to own any of it due to something like the company not raising another formal round or otherwise repaying the debt instead. That's subjectively a much worse case, then having an investment go to zero, which is rather expected.

Losing 100% of the investment is the "default" case, not at all worst or unexpected, getting converted into equity at a very small and unsure company is the "good" case, getting converted into the next snapchat or whatever is the amazing lottery-winning case, and losing out on the next snapchat or whatever despite ponying up the cash is the worst possible case that you would kick yourself for forever, subjectively speaking. IMHO.

If people here make lots of seed-stage convertible investments they can say whether this matches their valuations, this is just my opinion.

[001sky]

getting x>0 is now worse than getting x=0? No.

When they repay the debt, you're not "stuck with none of it" you're stuck with indeed a x>0 portion of the company's value. Strictly speaking, you are just stuck. What escapes you is the upside of an investment that you <did not make>.

The right (but not the obligation) to make that investment on pre-defined terms is the defintion of an "option".

[EGreg]

That depends, if you have a portfolio of many companies and you expect that most of them will fail but one will bring huge returns -- and then the one that should bring huge returns turns out to merely repay you 10%, then yes, it's worse.

[logicallee]

Clearly I meant from the point of view of a seed-stage investor's subjective valuation of alternatives. Nobody wants to have debt repaid when a company takes off that you could have had early stock in.

[001sky]

The one (only?) thing worse than debt in this case is an option that has CP's for exercise that aren't met. Then, you are truly fucked. I'm not trying to be pedantic, but its the nature of the topic at hand that to make any sense, some precision is required.

[asg]

From the documents, it appears that the holder has the option to get money back, or shares in the event of a merger/acquisition. They also have priority rights over shareholders in the event of a dissolution.

So no, they DO derive economic benefits, but it may be a long time coming.

[Edit: this is almost the same as convertible notes. The only difference is that as a debt holder they may be able to force a resolution at maturity, but that is usually to the detriment of the company. But as the preamble says, most angel/VC investors dont actually want to be a debtholder"