Understanding SAFEs, Priced Equity Rounds, and When to Make Your First Finance Hire

Understanding SAFEs, Priced Equity Rounds, and When to Make Your First Finance Hire

Introduction:

Raising funds and navigating the complex world of finance is a crucial aspect of growing a business. Two important concepts in fundraising are SAFEs (Simple Agreements for Future Equity) and priced equity rounds. Additionally, knowing when to make your first finance hire can greatly impact your business's growth potential. In this article, we will explore these topics, find common points, and provide actionable advice for entrepreneurs.

Understanding SAFEs and Priced Equity Rounds:

1. The Basics of SAFEs:

When converting into shares, SAFEs piggyback on the negotiated terms with the lead investor in the priced round. It's important to note that SAFEs are not debt but rather a commitment to invest. An uncapped SAFE means that the investor will receive the same price as the priced round investors. A most favored nation clause allows the investor to adopt better terms if other investors have negotiated a cap. The most common type of SAFE is the valuation cap only.

2. Calculating Valuation and Dilution:

The pre-money valuation plus the amount raised equals the post-money valuation of the company. Different SAFEs may have different caps, but these calculations can be done separately and then added together. Tracking the amount sold on SAFEs is essential. Typically, the option pool is around 10% but may go up to 15%. It's important to avoid excessive dilution.

3. Conversion and Series A Pricing:

In a priced round where SAFEs have been raised before, three things occur: SAFEs convert into shares, an option pool is increased or created, and new investors invest. When calculating the price per share for new investors, the conversion of SAFEs is included. If the priced round exceeds the cap, SAFEs convert at the cap, giving the SAFE holders more shares for the same amount of money.

Advice 1: Use Post-Money SAFEs:

Using post-money SAFEs can simplify calculations and ensure a smoother fundraising process. Understanding the terms and implications of different SAFEs is crucial for entrepreneurs.

Advice 2: Track Dilution and Company Ownership:

Keep track of your dilution and understand where the company is being sold. Maintaining a clear picture of ownership will help in making informed decisions and negotiating with investors.

Advice 3: Don't Over-Otpimize for Valuation Caps:

While fundraising is important, over-optimizing for valuation caps may not make as much difference as expected. Focus on the overall growth potential of your business and the value you can provide to investors.

When to Make Your First Finance Hire:

1. The Role of a Finance Hire:

The first finance hire's role is to organize frameworks and provide analysis to drive business growth. They fill the spaces within those frameworks with analysis, helping entrepreneurs understand their business better. Anecdotes and customer conversations may no longer be sufficient to tell the entirety of the business story.

2. Indicators for Hiring:

The best indicator for hiring a finance professional is believing that understanding your business better would lead to faster growth. When your business reaches a point where anecdotes and customer conversations are no longer enough to make strategic decisions, it's time to consider making your first finance hire.

Conclusion:

Understanding SAFEs, priced equity rounds, and knowing when to make your first finance hire are crucial aspects of fundraising and growing a business. By using post-money SAFEs, tracking dilution and company ownership, and avoiding over-optimization for valuation caps, entrepreneurs can navigate the fundraising landscape more effectively. Additionally, hiring a finance professional at the appropriate time can provide valuable insights and analysis to drive business growth. Remember, fundraising is a means to an end, and the focus should be on the overall potential and value of your business.