Post Category → Angels

Bundled v. Unbundled Startup Capital

TL;DR: The market for early-stage startup financing has reached a level of fragmentation and hyper-competition (among capitalists) never seen before. This competition has led to an increasingly atomized market, with a multitude of players offering different takes on the traditional “bundled” offering of smart venture capital. Startups and founders should understand the reasons behind the marketing narratives pushed by each of these players, so they don’t get too swept up in an overly simplistic strategy for how to raise capital. The best strategy is to diversify your capital sources, while still allowing room for smart leads writing large enough checks to provide real value add.

The world of early-stage startup financing looks extremely different today than it did even 5 years ago, and completely unrecognizable to the market of a decade ago. The reasons are fairly straightforward. Near-zero interest rates and slowing of international economic growth, together with government policies of quantitative easing (which inflate traditional asset prices and make further returns harder to achieve) have produced a surge in the amount of capital seeking any kind of “alpha” in the seemingly “final frontier” of early-stage startups. There is far more money chasing startups than perhaps any time in history.

This surge in early capital naturally produces a surge in competition among early capitalists. In order to navigate that competition, capitalists, just like any other service provider, seek ways to differentiate themselves in the market to avoid appearing too much like a commodity. It’s this need for early capitalists to differentiate themselves that has produced the “atomization” or unbundling of startup finance that is increasingly visible in the market. The point of this post is to help founders and early teams understand that unbundling in assessing their own financing strategies.

To speak of unbundling of course requires first understanding the original bundle. Historically, conventional venture capitalists “sold” the following bundle to startups:

  • Green cash money (obvious)
  • Signal – a brand that credibly signaled “eliteness” to the market (de-risking to an early startup), making it easier to further attract capital, employees, commercial partners, etc.
  • Network – a deep rolodex/LinkedIn network of contacts to leverage in recruiting and expansion
  • Advisory – active involvement on Boards and “coaching” to inexperienced executive teams.

In the very early days of conventional venture capital, VC was very scarce. In many markets there was quite literally one, maybe two funds, who served as gatekeepers to the market; and unhesitatingly used their market dominance to squeeze teams on valuation and corporate governance power. This “asshole” behavior inevitably produced demand for alternatives.

Enter the new “friendly” venture capitalists. Very large VC funds started to break up because the personal brands of high-profile VCs incentivized them to form their own funds with fewer mouths to feed. Growing interest in early-stage also brought in new market entrants. As the VC market evolved from a more oligopolistic structure to an increasingly fragmented and competitive market, the need for differentiation increased. “Friendliness” (or at least the well-calculated appearance of it) became a successful way to achieve that differentiation. You now had VCs actually competing with each other based on their reputation. But the general bundle offered by those VCs largely remained the same.

Another successful form of differentiation in this era involved going deep on “value add” services. Particularly in SV but now also in other markets, VC funds began to hire non-partner staff whose purpose was to, completely apart from providing money and Board service, help CEOs with recruiting, marketing, sales, etc. as a kind of external extension of their internal team. All that extra staff naturally costs money, and increases the overhead structure of the fund, which then increases their pressure to achieve highly outsized returns and avoid overly generous valuations.

So in the initial era of startup funding growth, VCs became “friendlier” (though caveats are worth emphasizing, see Trust, “Friendliness,” and Zero-Sum Startup Games) – and bulkier. But the flood of new capital kept on coming. VCs continued splintering off and forming micro-funds. More entrants arrived. Successful exits produced new, younger teams interested in trying their luck at the VC game. What to do with the VC market becoming even more competitive? Differentiate even further.

Enter accelerators and seed funds, and eventually pre-seed funds. As the true Series A market became increasingly crowded, continued competition among capitalists led many to conclude that the new way to avoid commoditization was to go earlier in the life cycle, closer to the territory once filled exclusively by angels (named as such because of their willingness to take risks once deemed off the table for professional investors). Rather than continuing the game of bulking up and emphasizing the “full package” bundle of traditional VCs, these new institutions sought differentiation by slimming down, and emphasizing their ability and willingness to move fast and early. Those old-school VCs are slow and over-bearing, the marketing content says. They don’t really provide any value-add. Take our cheaper, faster, “friendlier” money instead.

We are now entering a new era where “solo capitalists” are the hot topic. New in some ways, but the same dynamics of market competition and necessary differentiation are quite old. Why take money from a fund at all, when you can just raise from a set of successful solo founders? They’re super friendly, don’t care about a board seat, and will move lightning fast without pestering you with “negotiation” or other trivialities. Their ultra-low overhead also means they can pay higher valuations. And of course they’re enabled by new tech platforms for raising and distributing capital that are very much invested in the increasing atomization of startup capital, which increases demand for technology to coordinate and facilitate that atomization.

In 2020, the market of very early-stage funding for startups now looks like this:

  • Solo angel investors
  • Angel networks
  • Angel “syndicates”
  • Accelerators of various flavors
  • Scout money from “bulky” traditional VCs
  • Pre-seed funds
  • Seed funds
  • Series A funds that invest in seed rounds
  • Solo VCs
  • “Lean” startup lenders

Throw in the reality that geography is hardly a barrier to capital flows now – especially in the COVID era – and the early-stage funding market has reached a level of hyper-fragmentation and competition that was unimaginable a decade ago. Within a particular market, the number of players has shot up dramatically, and now those players are increasingly happy to cross state lines.

This is undeniably a fantastic environment for top-tier teams looking to raise early funding. It’s also undeniably a far more stressful environment to be a startup investor. Ten years ago being a VC meant everyone came to you, very warm intro required, and you called the shots. Now VCs hustle so hard for visibility some are even engaging production studios to help them create polished youtube channels. Others don’t even require intros anymore and have opened their DMs on twitter. There are even jokes about VCs trying to create viral memes to get eyeballs. Life comes at you fast.

The important message for startup teams is to understand why the landscape now looks the way it does, and the incentives behind why any particular type of investor markets itself the way it does. Accelerators, for example, now face far more competition than they did in their golden era, particularly from seed funds with legitimate “value add” offerings. See: Why Accelerators Compete with Smart Money. Because the “bundle” of an accelerator is heavily weighted toward its network and signaling value, accelerators have for some time been incentivized to promote a narrative of “dumbing down” early capital that doesn’t have its own competing network, thus keeping the accelerator’s value proposition somewhat relevant.

Similarly, ultra-lean funds and Solo VCs lack by design the resources of larger funds, and thus they are incentivized to push a narrative that traditional “hands on” VCs don’t really add value. The new lean players don’t have the time or the resources to add value themselves, so best to talk as if that particular part of the traditional bundle isn’t that meaningful anyway.  This all, of course, is easily disproven by the number of founders in the market who credibly testify to the value (in advisory, network, deep long-term pockets) in having a large fund with full skin-in-the-game on your Board and cap table. Some (not all) large funds really do provide significant added value.

And of course, traditional VC funds talk their own books with the exact opposite story. The fragmented lean investors are all spray-and-pray “dumb money” looking for party rounds. Teams need value add from seasoned, steady hands willing to roll up their sleeves on Boards. You need more than atomized money. You need a trusted “partner” to shepherd you toward success.

There is absolutely no need to take sides in all of these narratives. Why should you? Every player in the market offers a grain of truth, but also exaggeration and over-simplification, in what they’re saying. The most important thing is not to get too swept up in moralizing or marketing. Understand what each player is selling, and understand what your particular needs are.

Often times the smartest teams do a bit of “shopping” across various aisles in the new VC supermarket. Team up with a reputable seed fund, but use your optionality to ensure the terms are reasonable. Let them write a large enough check to be emotionally invested, but fill the rest of the round with smaller high-signal checks that will also be motivated to connect you with their networks. For good measure, if you have interest from a traditional Series A VC fund, let them write a small check in your seed round to keep the connection warm when Series A discussions start. The fact that they know how well networked you are (thanks to the other players on your cap table) will ensure good behavior at the Series A term sheet stage.

Contexts will vary and team needs will vary, so the particular mix of early capital any particular startup takes will naturally vary as well. Stay flexible and avoid rigid theories about the (air quotes) “right” way to raise funding. But in all cases, make an effort to diversify your network and capital sources. Nothing ensures good behavior from the money better than making it crystal clear that you are well-networked and happy to take someone else’s check if your current investors don’t play ball. You can do so while still building strong connections with your investors, demonstrating that you value their relationship. This is a great time to be an entrepreneur, whether in or outside of Silicon Valley. In navigating the new early-stage funding market, don’t drink too much of anyone’s kool-aid, and shop wisely.

Crisis, Relationships, and VCs

TL;DR: Startups who resisted building durable relationships with professional institutional investors, and instead pursued the “party round” competitive fundraising mindset promoted heavily by certain SV voices, are going to get a rude awakening in this current crisis. But the same may be true of startups who failed to reasonably diversify their funding options. The easiest money in good times is the first to leave the stadium in scarier times.

In talking with various market players in startup ecosystems, you’ll hear a wide spectrum of philosophies on how early-stage startups should engage with investors, particularly institutional investors (VCs). On one end of the spectrum are, of course, the VCs themselves. Predictably they tend to favor fundraising philosophies that minimize competition between investors, emphasize qualitative over quantitative (valuation, ownership %) variables, and keep the number of players on the cap table low; which improves their leverage and ability to get a bigger piece of the limited pie. Terms like “marriage” “value add” and “partnership” tend to dominate this perspective. We’ll call this “relationship maximalism.”

On the other end of the spectrum are players who might be called “competitive maximalists” as it relates to VC funding. From their perspective, there is so much capital chasing deals, and the true “value add” of institutional investors is minimal, so any smart set of founders will focus on maximizing valuation, and minimizing control given to investors. This often means “party rounds” in which lots of funds write smaller checks with no true lead. This perspective finds its greatest proponents in Silicon Valley, where the largest concentration of capital (and therefore competition among capital) can be found.

It’s important to point out that there are “money players” in the market who, at least historically, have themselves promoted the competitive maximalist view of early-stage fundraising. Prestigious startup accelerators are, effectively, a service provider whose “bundle” of value is in many ways competitive with “smart” relationship-oriented venture capital, which encourages them to promote a narrative that downplays relationship-based fundraising and promotes competitive processes. See: Why Startup Accelerators Compete with Smart Money.

In order to get more control over their pipelines, institutional VCs have moved much earlier-stage in their investing, often writing seed checks for a few hundred K as a way to get a meaningful foot in the door on a promising but very early startup. If you manage to build strong relationships very early on with VCs and “value add” angels whose brand/signal can give you access to a helpful network of talent, resources, and other investors, then your need for an “accelerator” is reduced significantly. The whole point of an accelerator is to make it easier to access talent, money, and other resources. That means your willingness to pay their “fee” of 6-8% of your cap table goes down if you can access that “bundle” via smart money, or other people, that you’ve hustled connections to on your own.

Naturally, those accelerators don’t like that, so they’re incentivized to promote a philosophy that makes founders believe all institutional investors are effectively the same, and that relationship-oriented early-stage VCs who resist competitive fundraising processes and very high valuations are largely blowing smoke. They want to, in the eyes of startups, marginalize a potential substitute (smart VCs with their own networks and value add) and promote a complement (dumb money).

Now how does this all relate to the current environment, in which the COVID-19 market shock has clearly slowed down early-stage funding? The length and intensity of the slow-down is still of course an open question with all the uncertainties around how long quarantines/lock-downs will last, and the fact that many funds are sitting on cash that they still need to deploy; but it is certainly real. How should founders approach VCs? As a venture lawyer who doesn’t represent a single institutional investor – see: Relationships and Power in Startup Ecosystems if you want to understand why – my opinion from experience is that the correct approach for most startups lies somewhere in the middle.

I have seen “party round” culture result in so many blowups that it clearly is reckless and should be avoided. Even some of its most vocal evangelists find themselves back-tracking on the approach as the results play out in the market. But I’ve also seen the extremely negative consequences from becoming too dependent on a single VC or syndicate of closely affiliated VCs, which increases their ability to play power games on Boards and extract value that they otherwise wouldn’t have if the cap table were slightly more competitive.

Relationships matter, and it is unquestionably the case that some institutional investors truly are worth accepting a lower valuation, a larger “lead” check, and giving more control away to, in order to “partner” with them long-term. This is obviously the case in a bear market, but it’s also true in a bull market because even in bull markets no founder team ever knows when a crisis – personal or systemic – will slap them in the face. A VC with a sizable percentage of your cap table has “skin in the game” to help you through a crisis. A party round investor for which you are one of 40 investments is far more likely to sit out a crisis and play it safe.

That being said, you can still build strong relationships with VCs, and give them meaningful skin in the game, without being foolishly over-dependent on them. It is wise, if you have options, to include on your cap table a sufficient diversity of un-affiliated investors such that if one group becomes unreasonably “uppity” you have other supporters to turn to. Too much optionality turns into a party round, but some optionality is wise and valuable.

Clearly the startups that will have the easiest time in this crisis, however long it lasts, are those with enough cash in the bank to weather the storm. But for those who will need to enter the fundraising market in the next 3-6 months, without a doubt the competitive maximalists who’ve filled their cap tables with lots of small checks, and refused to let anyone participate in governance and build a relationship with the executive team, are going to be in for a rude awakening. They’re going to learn the hard way how “easy come, easy go” applies to early-stage fundraising.

Build meaningful, durable relationships with professional investors with the character and resources that can provide valuable insurance when an unpredictable crisis hits. Just ensure you’re well-advised throughout the process, so the “relationship” develops in a way that is balanced, and your company isn’t over-exposed.

Why Startups shouldn’t use YC’s Post-Money SAFE

TL;DR: If you’re going to use it, you should make some slight (but material) tweaks. It otherwise gives your seed investors a level of extreme anti-dilution protection that is virtually unheard of (circa 2019) in startup finance, making it worse than seed equity and conventional convertible notes (or pre-money SAFEs) in terms of economics for most seed stage companies; which is of course why investors love it. There are far better, more balanced ways to “clarify” ownership for seed investors without forcing founders and employees to absorb additional dilution risk. YC has done a “180” in moving from the pre-money SAFE (very company friendly) to the post-money SAFE (extremely seed investor friendly).

Post-Publishing Updates:

A regular underlying theme you’ll read on SHL is that key players in the startup community are incredibly talented at taking a viewpoint that is clearly (to experienced players) investor-biased, but spinning / marketing it as somehow “startup friendly.”  And lawyers captive to the interests of investors are always happy to play along, knowing that inexperienced teams can be easily duped.

One example is how “moving fast” in startup financing negotiations is always a good thing for entrepreneurs. Investors are diversified, wealthy, and 100x as experienced as founders in deal terms and economics, but it’s somehow in the founders’ interest to sign whatever template the investor puts on the table, instead of actually reviewing, negotiating, and processing the long-term implications? Right.

Y Combinator’s move to have its SAFEs convert on a post-money, instead of pre-money, basis is another great example. Their argument is that it helps “clarify” how the SAFEs will convert on the cap table. Clarity is great, right? Who can argue with clarity?

What’s not emphasized prominently enough is that the way they delivered that “clarity” is by implementing anti-dilution protection for SAFE investors (like themselves) that is more aggressive than anything remotely “standard” in the industry; and that wasn’t necessary at all to provide “clarity.” Under YC’s new SAFE, the common stock absorbs all dilution from any subsequent SAFE or convertible note rounds until an equity round, while SAFE holders are fully protected from that dilution. That is crazy. It’s the equivalent of “full ratchet” anti-dilution, which has become almost non-existent in startup finance because of how company unfriendly it is. In fact, it’s worse than full ratchet because in a typical anti-dilution context it only triggers if the valuation is lower. In this case, SAFE holders get fully protected for convertible dilution even if the valuation cap is higher. It’s a cap table grab that in a significant number of contexts won’t be made up for by other more minor changes to the SAFE (around pro-rata rights and option pool treatment) if a company ends up doing multiple convertible rounds.

When you’re raising your initial seed money, you have absolutely no idea what the future might hold. The notion that you can predict at your initial SAFE closing whether you’ll be able to raise an equity round as your next funding (in order to convert your SAFEs), or instead need another convertible round (in which case your SAFE holders are fully protected from dilution), is absurd. Honest advisors and investors will admit it. Given the dynamics of most seed stage startups, YC’s post-money SAFE therefore offers the worst economics (for companies) of all seed funding structures. Founders should instead opt for a structure that doesn’t penalize them, with dilution, for being unable to predict the future.

Yes, YC’s original (pre-money) SAFE has contributed to a problem for many SAFE investors, but that problem is the result of an imbalanced lack of accountability in the original SAFE structure; not a need to re-do conversion economics. As mentioned in the above TechCrunch article, the reason convertible notes are still the dominant convertible seed instrument across the country is that the maturity date in a convertible note serves as a valuable “accountability” mechanism in a seed financing. A 2-3 year maturity gives founders a sense of urgency to get to a conversion event, or at least stay in communication with investors about their financing plans. By eliminating maturity, SAFEs enabled a culture of runaway serial seed financings constantly delaying conversion, creating significant uncertainty for seed investors.

YC now wants to “fix” the problem they themselves enabled, but the “solution” goes too far in the opposite direction by requiring the common stock (founders and early employees) to absorb an inordinate amount of dilution risk. If “clarity” around conversion economics is really the concern of seed investors, there are already several far more balanced options for delivering that clarity:

Seed Equity – Series Seed templates already exist that are dramatically more streamlined than full Series A docs, but solidify ownership for seed investors on Day 1, with normal weighted average (not full ratchet) anti-dilution. 100% clarity on ownership. Closing a seed equity deal is usually a quarter to a third of the cost of a Series A, because the docs are simpler. Seed equity is an under-appreciated way to align the common stock and seed investors in terms of post-funding dilution. Yes, it takes a bit more time than just signing a template SAFE, but it’s an increasingly popular option both among entrepreneurs (because it reduces dilution) and investors (because it provides certainty); and for good reason.

See also: Myths and Lies about Seed Equity to better understand the false arguments often made by investors to push founders away from seed equity as a financing structure.

Harden the denominator – Another option I’ve mentioned before in Why Notes and SAFEs are Extra Dilutive is to simply “harden” the denominator (the capitalization) that will be used for conversion on Day 1, while letting the valuation float (typically capped). This ensures everyone (common and investors) are diluted by subsequent investors, just like an equity round, while allowing you to easily model conversion at a valuation cap from Day 1. If the real motivation for the SAFE changes was in fact the ability to more easily model SAFE ownership on the cap table – instead of shifting economics in favor of investors – this (hardening the conversion denominator) would’ve been a far more logical approach than building significant anti-dilution mechanisms into the valuation cap.

See “Fixing” Convertible Note and SAFE Economics for a better understanding of how hardening the denominator in a note or SAFE valuation cap gives the “best of both worlds” between convertibles and equity rounds.

Add a Maturity Date – Again, the reason why, outside of Silicon Valley, so many seed investors balk at the SAFE structure altogether is because of the complete lack of accountability mechanisms it contains. No voting rights or board seat. No maturity date. Just hand over your money, and hope for the best. I don’t represent a single tech investor – all companies – and yet I agree that SAFEs created more problems than they solved. Convertible notes with reasonable maturity dates (2-3 years) are a simple way for investors and entrepreneurs to get aligned on seed fundraising plans, and if after an initial seed round the company needs to raise a second seed and extend maturity, it forces a valuable conversation with investors so everyone can get aligned.

Conventional convertible notes – which are far more of an (air quotes) “standard” across the country than any SAFE structure – don’t protect the noteholders from all dilution that happens before an equity round. That leaves flexibility for additional note fundraising (which very often happens, at improved valuations) before maturity, with the noteholders sharing in that dilution. If a client asks me whether they should take a low-interest capped convertible note with a 3-yr maturity v. a capped Post-Money SAFE for their first seed raise, my answer will be the convertible note. Every time, unless they are somehow 100% positive that their next raise is an equity round. The legal fees will be virtually identical.

Before anyone even tries to argue that signing YC’s template is nevertheless worth it because otherwise money is “wasted” on legal fees, let’s be crystal clear: the economics of the post-money SAFE can end up so bad for a startup that a material % of the cap table worth as much as 7-figures can shift over to the seed investors (relative to a different structure) if the company ends up doing additional convertible rounds after its original SAFE; which very often happens. Do the math.

The whole “you should mindlessly sign this template or OMG the legal fees!” argument is just one more example of the sleight-of-hand rhetoric peddled by very clever investors to dupe founders into penny wise, pound foolish decisions that end up lining an investor’s pocket. It can take only a few sentences, or even the deletion of a handful of words, to make the economics of a seed instrument more balanced. Smart entrepreneurs understand that experienced advisors can be extremely valuable (and efficient) “equalizers” in these sorts of negotiations.

When I first reviewed the new post-money SAFE, my reaction was: what on earth is YC doing? I had a similar reaction to YC’s so-called “Standard” Series A Term Sheet, which itself is far more investor friendly than the marketing conveys and should be rejected by entrepreneurs. Ironically, YC’s changes to the SAFE were purportedly driven by the need for “clarity,” and yet their recently released Series A term sheet leaves enormous control points vague and prone to gaming post-term sheet; providing far less clarity than a typical term sheet. The extra “clarity” in the Post-Money SAFE favors investors. The vagueness in the YC Series A term sheet also favors investors. I guess YC’s preference for clarity or vagueness rests on whether it benefits the money. Surprised? Entrepreneurs and employees (common stockholders) are going to get hurt by continuing to let investors unilaterally set their own so-called “standards.”

One might argue that YC’s shift (as an accelerator and investor) from overly founder-biased to overly investor-biased docs parallels the natural pricing progression of a company that initially needed to subsidize adoption, but has now achieved market leverage. Low-ball pricing early to get traction (be very founder friendly), but once you’ve got the brand and market dominance, ratchet it up (bring in the hard terms). Tread carefully.  Getting startups hooked on a very friendly instrument, and then switching it out mid-stream with a similarly named version that now favors their investors (without fully explaining the implications), looks potentially like a clever long-term bait-and-switch plan for ultimately making the money more money.

YC is more than entitled to significantly change the economics of their own investments. But their clear attempts at universalizing their preferences by suggesting that entrepreneurs everywhere, including in extremely different contexts, adopt their template documents will lead to a lot of damaged startups if honest and independent advisors don’t push back. The old pre-money SAFE was so startup friendly from a control standpoint that many investors (particularly those outside of California) refused to sign one. The new post-money SAFE is at the opposite extreme in terms of economics, and deserves to be treated as a niche security utilized only when more balanced structures won’t work. Thankfully, outside of pockets of Silicon Valley with overly loud microphones, the vast majority of startup ecosystems and investors don’t view SAFEs as the only viable structure for closing a seed round; not even close.

The most important thing any startup team needs to understand for seed fundraising is that a fully “standard” approach does not exist, and will not exist so long as entrepreneurs and investors continue to carry different priorities, and companies continue to operate in different contexts. Certainly a number of prominent investor voices want to suggest that a standard exists, and conveniently, it’s a standard they drafted; but it’s really just one option among many, all of which should be treated as flexibly negotiable for the context.

Another important lesson is that “founder friendliness” (or at least the appearance of it) in startup ecosystems is a business development strategy for investors to get deal flow, and it by no means eliminates the misaligned incentives of investors (including accelerators). At your exit, there are one of two pockets the money can go into: the common stock or the investors. No amount of “friendliness” changes the fact that every cap table adds up to 100%. Treat the fundraising advice of investors – even the really super nice, helpful, “founder friendly,” “give first,” “mission driven,” “we’re not really here for the money” ones – accordingly. The most clever way to win a zero-sum game is to convince the most naive players that it’s not a zero-sum game.

Don’t get me wrong, “friendly” investors are great. I like them way more than the hard-driving vultures of yesteryear. But let’s not drink so much kool-aid that we forget they are, still, investors who are here to make money that could otherwise go to the common stock; not your BFFs, and certainly not philanthropists to your entrepreneurial dreams.

Given the significant imbalance of experience between repeat money players and first-time entrepreneurs, the startup world presents endless opportunities for investors (including accelerators) to pretend that their advice is startup-friendly and selfless – and use smoke-and-mirrors marketing to convey as much – while experienced, independent experts can see what is really happening. See Relationships and Power in Startup Ecosystems for a deeper discussion about how aggressive investors in various markets gain leverage over key advisors to startups, including law firms, to inappropriately sway negotiations and “standards” in their favor.

A quick “spin” translation guide for startups navigating seed funding:

“You should close this deal fast, or you might lose momentum.” = “Don’t negotiate or question this template I created. I know what’s good for you.”

“Let’s not ‘waste’ money on lawyers for this ‘standard’ deal.”  = “Don’t spend time and money with independent, highly experienced advisors who can explain all these high-stakes terms and potentially save a large portion of your cap table worth an order of magnitude more than the fees you spend. I’d prefer that money go to me.”

“We’re ‘founder friendly’ investors, and were even entrepreneurs ourselves once.” = “We’ve realized that in a competitive funding market, being ‘nice’ is the best way to get more deal flow. It helps us make more money. Just like Post-Money SAFEs.”

“Let’s use a Post-Money SAFE. It helps ‘clarify’ the cap table for everyone.” = “Let’s use a seed structure that is worse for the common stock economically in the most important way, but at least it’ll make modeling in a spreadsheet easier. Don’t bother exploring alternatives that can also ‘clarify’ the cap table without the terrible economics.”

There are pluses and minuses to each seed financing structure, and the right one depends significantly on context. Work with experienced advisors who understand the ins and outs of all the structures, and how they can be flexibly modified if needed. In the case of startup lawyers specifically, avoid firms that are really shills for your investors, or who take a cookie-cutter approach to startup law and financing, so you can trust that their advice really represents your company’s best interests. That’s the only way you can ensure no one is using your inexperience – or fabricating an exaggerated sense of urgency or standardization – to take advantage of you and your cap table.