The key idea of the video is that founders should understand their cap table, use tools like safes and cap table dot io, and carefully negotiate caps to avoid dilution and unfair deals when raising money for their company.

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  00:00

  Founders should understand their cap table and use tools like safes and cap table dot io to keep track of important information when raising money for their company.

  • Understanding how much of the company you've sold to investors and how much you own is crucial at all stages of the company's life cycle, especially when raising money on convertible instruments.
  • Founders should understand the mechanics of their cap table and maintain it themselves, as it is their responsibility to know who owns how many shares.
  • The presentation covers three sections, including the use of safes for US companies and other tools like cap table dot io and carter for keeping track of important information.
  • The presentation covers the life cycle of a company from incorporation to raising a priced series A round, including details on safes and dilution, and provides top tips on raising money.
  • A safe is a simple agreement for future equity where the investor gives money in exchange for a promise of shares at a future date, with minimal negotiations on the amount of money and valuation cap, making it easier to close and raise money compared to a priced round.
  • Safes, unlike convertible debt, do not have an interest rate or maturity date, but will piggyback on the terms negotiated with the lead investor in the priced round.
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  06:28

  The newest version of safes includes a marker for changes made to the safe, with five sections including key events, definitions, company capitalization, representations, and legal language, but only sections one and two are crucial to read and understand.

  • The newest version of safes includes a paragraph that serves as a marker for changes made to the safe, making it easier for founders to identify and review any modifications.
  • The safe agreement is split into five sections, with the first section addressing the key events that might drive change and clarifying what happens in those situations, while the second section provides definitions for terms used in the agreement.
  • The document has five sections including company capitalization, representations made by the company and investors, and legal language.
  • Sections one and two are the most important parts of the safe and only three pages long, so it's recommended to read and understand them.
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  10:21

  The company introduced post-money safes to simplify dilution and ownership calculations for founders and investors during fundraising.

  • The company introduced post money safes to make it easier for founders to understand the dilution they were taking and how much of the company they had sold to investors.
  • The pre-money valuation plus the amount of money raised equals the post-money valuation, and the ownership of investors is determined by their amount raised divided by the post-money valuation in the case of a priced round or valuation cap in the case of a safe.
  • The most common type of investment is a valuation cap, but there are also options for investors to receive the same price as priced round investors or to have an uncapped safe with a most favored nation clause.
  • This lecture covers dilution and understanding cap tables in the context of a company's growth and fundraising process.
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  15:21

  Founders sold 15% of the company, resulting in their ownership being diluted to 85%, which is important to keep in mind during future fundraising.

  • Two founders split their shares equally, then two investors come in and own 5% and 10% of the company respectively based on their investment and post-money valuation cap.
  • Founders have sold 15% of the company, resulting in their ownership being diluted to 85%, which is important to keep in mind during future fundraising.
  • Founders are the only ones being diluted at the moment due to the construct of post-money safes, and having authorized but unissued shares in the treasury doesn't necessarily make a difference.
  • Different post-money valuation caps for investments can be due to the timing of the investment and the changing risk level of the company.
  • The company created an employee incentive plan with 750,000 shares, issued 650,000 shares to early employees, and now has a total of 10 million shares fully diluted, resulting in the founders owning 92.5% and the option plan owning 7.5% of the company.
  • Founders may think they own 92.5% of the company, but they actually own 85% due to selling 15% and forgetting about the dilution from safes.
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  22:49

  The company raised $5 million with a pre-money valuation of $15 million, resulting in a post-money valuation of $20 million and an option pool for new employees.

  • The company has raised a price round with a pre-money valuation of $15 million and plans to raise a total of $5 million, with the lead investor investing $4 million, resulting in a post-money valuation of $20 million, and an option pool of 10-15% for new employees.
  • The lead investor is expected to own 20% of the company after investing $4 million in a series with a total of $25 million.
  • In a priced round, when a company raises money on post-money saves and then raises a priced round, three things happen simultaneously in terms of the documents and calculations.
  • Post-money safes convert into shares, an options pool is created, and new investors invest, with the calculation including the safes in the pre-money.
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  27:51

  Safe investors will convert into 15% of the company, with the first investor receiving 5% and the second investor receiving 10%, based on the valuation cap in the safe, and it's important to negotiate caps carefully to avoid dilution and unfair deals.

  • The safes will convert into 15% of the company, resulting in a total of 11,764,705 shares, with the first safe investor receiving 5% and the second safe investor receiving 10%.
  • This step in the priced round calculation shows where the 15% dilution came from and how it affected the ownership percentages of the founders and employees.
  • The five and ten percent is based on the valuation cap in the safe, and if the priced round valuation is higher than the valuation cap, it is just connected to the existing shareholders, but if the priced round is lower than the valuation cap, safe investors will get a better deal.
  • Raising money triggers conversion regardless of the valuation, so it's important to keep in mind when negotiating safes to avoid setting caps too high.
  • If you sell more of your company than expected, including convertible debt, the calculation is slightly different and they would convert into shares in relation to the price round, but if you sell 85% of your company and the valuation is lower, you can't share with them, which is a problem for founders who raise too much money on too low valuation caps.
  • It's important to ensure that the cap of a safe is not higher than the price range to avoid dilution and unfair deals for safeholders in comparison to series A investors.
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  35:16

  Investors are unlikely to accept lower valuations than safes, option pool increases to 10 through complicated calculation, fully diluted shares after safe conversion and option pool increase is 13.5 million, founders own 51.5% and lead investor owns 20%.

  • In the current environment, it is unlikely for people to raise price rounds at lower valuations than their safes due to investors wanting to get the bonus of the lower price when their safes convert.
  • The option pool is increased through a complicated calculation to reach 10.
  • Increasing the option pool by 1.695 million flows through into the cap table and the new money invests with a price per share calculated as the valuation divided by the capitalization.
  • The total fully diluted shares after safe conversion and option pool increase is 13.5 million, and the number of shares series A investors get is the amount they're investing divided by their price per share.
  • The cap table shows the distribution of shares and ownership percentages after the series A funding round, with the founders owning 51.5% and the lead investor owning 20%.
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  40:44

  Use post-money safes, track dilution, and avoid over-optimizing valuation caps when raising money.

  • Keep track of dilution when raising money on safes and avoid combining safes and convertible notes to simplify calculations, but it's okay to use pre-money saves if you've already raised on them.
  • When raising money on pre-money safes, it's still possible to estimate dilution for future raises on post-money safes, but calculations may be slightly more complex, so it's recommended to switch to post-money safes for easier tracking of future dilution.
  • Don't over-optimize fundraising by trying to push the cap too high, as it's just a means to an end and negotiating with investors who do this all day is not something you do every day.
  • Use post-money safes, keep track of dilution, and don't over-optimize for valuation caps as it doesn't make as much difference as you think.