Questions about SAFE Notes for a Startup
Quick VC questions for you banker folks - I'm building a startup and was told I need to leave my job and go start raising capital for my business. It's been a while since I've done anything VC-finance related so just wondering if someone can help me out here.
We're a pre-revenue company, and I was told we should go aim for a seed stage raise with a $10MM-$20MM valuation cap.
- Does this give us a theoretical company valuation right now even if we don't have any customers/visitors to our tech platform yet?
- When an investor provides us with SAFE Financing, what happens if we never go on to raise another financing? Since the investor's only "asset" is the right to invest at the lower of the valuation cap or the pre-money valuation in the subsequent round, what happens if the founding team chooses not to have a subsequent financing round and just fund the business from ongoing cashflows permanently?
- If you start fundraising at the seed stage - are you basically pigeonholed to have to continue to keep doing equity raises until as the founder you basically have some stupid small amount of equity left like 20%?
- Do you all buy into this "raise > invest in operations to improve sales / ignore bottom line > raise > repeat" cycle in Silicon Valley? While your ownership % will go down drastically, people keep telling me that the value of my shares will rise - but isn't this only based on a super bull tech market? At some point the real value has to be the claim to the operating cash flows am I right?
- Should I focus on growing slowly using only my own resources (savings from my paycheques at work) to grow my startup and keep my 50% equity or should I sell my soul to Silicon Valley and go raise money on my first startup and go down that road?
PLEASE HELP
Have done a few of these, so my $0.02
Thanks for the detailed response!
On Point 5) - we're a consumer oriented startup (skill-gaming platform vertical) so pilot customers would need to come in large masses for us to start generating meaningful revenue. We were told by an investor that if we decide to launch now on our bootstrapped resources, if the initial traction doesn't go our way, it'll be significantly more difficult to raise. On the other hand, if we raise ahead of our launch (we already have a Version 1 of our website 90% done), then we can "sell the launch" to the investors. What are your thoughts, does this change your answer?
It kind of depends on how much $ you and your cofounder(s) have, and how replaceable it is. The further you can get without outside financing, the better (obviously) but I'd spend only as much as you need to have some good KPIs, then raise. You'll have better odds of success, and a better valuation. But raise only what you need for max 24 months of runway, and be even keeled about the valuation. The higher it is, the harder it's going to be to raise the next one, if there is a next one.
TBH, $10-20m valuation cap is pretty high for pre-rev, but you didn't describe other traction you might have - seems like you dont have any users as you haven't launched yet so comment holds.
While its nice to not dilute as much, the benefits right now of raising a smaller amount on a lower valuation (say 5-7m) are tactical: you'll reduce the risk of a down round later on. $10-20mm needs to be supported a bit more and if you can't justify it, especially post launch, you're in for a rough time trying to keep momentum.
Raise a little now at a lower valuation to get to the next milestone, then raise more at a better valuation when you can show a traction story.
That seems to be kind of realistic.. most SAFE notes seem to have between a $2MM and $20MM valuation cap so I think that kind of says it all right there.
This is my first startup though and it’s basically my baby I don’t want to lose all my ownership in it just for a faster scale-up, but the other side of me is dying to see traction/growth because I’ve been poor and working my ass off for a very long time and I’m ready to change the poor part.
That’s good feedback thanks! We spoke to a founder of a video game company and he said he did a SAFE at a $20MM cap with the only traction having been letting users play on weekends only a few times and not actually launching - with the intent of learning and getting feedback.
Im thinking of us starting our platform the same way - weekends only for a little bit so we can say we haven’t fully launched to investors but also we can see for ourselves if we’ll have some of that initial traction we’re seeking and gain valuable feedback from customers.
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