The Open Startup Pro-Forma Capitalization Model

TL;DR: In the earliest stages of a startup, paying for a proprietary cap table tool, or simply dealing with the hassle of a 3rd-party intermediary software layer for modeling your capitalization, is not really necessary. We’re publishing the Open Startup Model, an Excel-based “open source” cap table and pro-forma that startups and their lawyers or other experienced advisors (if they don’t already have their own tools) can use for free. It’s based on the pro-forma structure we’ve used for hundreds of deals, and is flexible, editable and auditable.

Background reading:

In the beginning, there was Microsoft Excel, and it was good (enough).

For decades, startup cap tables and pro-forma financing models were maintained on Excel. It wasn’t perfect (nothing is), but it worked well enough. Then as the ecosystem matured, we saw the emergence of specialized cap table software, like Carta (pricier incumbent) and Pulley (leaner alternative). These tools make a lot of sense at moderate (not low) levels of cap table complexity – based on our experience at Optimal, typically around Series A or post-Seed.

But somewhere along the way some founders got the impression that these tools might be needed as early as the incorporation of the company, when there are only a handful of people on the cap table. The argument, certainly made by the cap table software vendors themselves, is that Excel is too clunky, and too error-prone. There is also a land grab dynamic here, in that it isn’t necessarily profitable for these tools to have tons of very small companies on them, but they have to build super early-stage offerings to prevent their competitors from owning the pipeline. There’s no simple way for the tools to agree to leave young companies alone, so we get these silly value-destroying attempts to onboard everyone.

All of this is, candidly, nonsense. I’ve seen seed-stage companies spending thousands of dollars a year and getting absolutely nothing extra of value that they couldn’t get from a basic excel spreadsheet maintained by someone moderately competent.

What makes old-school Microsoft Excel a still-used tool in startup finance is its flexibility, auditability, simplicity, and affordability (free, essentially). It’s really only once you’ve crossed about 20 cap table stakeholders that in our experience, as counsel to hundreds of VC-backed companies, a third-party tool starts to make sense. Before then, I often see more mistakes when founders try to use an inflexible outside tool than when they simply collaborate with a sharp outside advisor to keep things clean and simple on a spreadsheet.

That being said, one thing that has happened is the complexity of seed funding instruments has grown over time. See the Seed Round Template Library and Seed Round Educational Articles.

In the really early days, before the entire seed ecosystem even existed, most financing was in equity rounds. But as the SaaS revolution got started, financings both shrunk in size and exploded in volume, with equity rounds no longer making sense in many cases. So we got seed-stage convertible notes. Then we got notes with pre-money valuation caps, discounts, or both. Then you got pre-money SAFEs. Then you got post-money SAFEs, and various flavors of them. Then you got post-money convertible notes. Time-based discounts and caps. Milestone-based caps. Don’t forget friends & family SAFEs, which are slightly different. Oh, and let’s not forget seed equity v. NVCA equity. Even within these categories there are various nuances and flavors.

It is not surprising to us at all that the ecosystem has resisted all attempts to hyper-standardize fundraising instruments, notwithstanding the valiant (even if self-interested) attempts by high-profile VCs or software tools to centralize all fundraising terms. This reflects the decentralized reality of the startup ecosystem. Startups are not uniform commodities, nor are their investors. In the latter category, think of bootstrapping, friends and family, angels, super angels, angel syndicates, pre-seed funds, seed funds, family offices, crowdfunding, accelerators, VCs with seed fund arms, strategic investors.

Couple that organic diversity on the investor side with the extremely diverse industries, business models, geographies, team compositions and cultures, risk tolerances, and exit expectations of startup companies. Do we really expect all of these sophisticated business people playing with millions and tens of millions of dollars, gunning for hundreds of millions to billions, to fit into one or two template financing structures because some VC, accelerator, or cap table software says they should? Because of some childish aversion to actually reading a contract and tweaking a few terms?

The only people misguidedly trying to hyper-standardize this complex ecosystem are (i) specific VCs who profit from controlling terms, with their preferred templates, and (ii) specific software companies (often funded by the aforementioned VCs) who want to build some centralized proprietary tool on which all startup financing would at some point become dependent (surely with juicy margins to them as a result). Neither of these types of rent-seeking gatekeepers are looking out for the ecosystem itself, and its diversity of preferences and priorities; certainly not for entrepreneurs. They’re looking out for themselves (for which, as market actors, I don’t fault them).

Many entrepreneurs and startup teams in particular have lost huge amounts of equity and money by being misled into signing inflexible contracts that they thought were “standard,” but really aren’t. The smallest bit of tweaking and negotiation can produce enormous differences in financial outcomes.

Given the diversity of businesses and investors in the startup ecosystem, which inevitably leads to a diversity of funding instruments, flexibility of any viable wide-reaching startup capitalization model is key. That’s why MS Excel still matters, because of how flexible it is. Flexible and transparently auditable in the way that open source code is flexible; and proprietary “no code” tools are not.

Led by a Partner colleague of mine, Jay Buchanan, we’ve published the Open Startup Model. Free, Excel-based, flexibly customizable and auditable, even “forkable” if others want to iterate on it. “Open Source” effectively. It’s based on the same model we’ve used hundreds of times at Optimal, with clients backed by elite VCs like a16z, Sequoia, Accel, Khosla etc. and dozens of “long tail” funds across the world as well. It works from the formation of the company through Series A (or a Series Seed equity round).

Jay will be writing periodically at OpenStartupModel.com, with info on how to take better advantage of it. Just like open source code isn’t intended to be handled by untrained end-users, this model is not intended to be entirely self-serve by founders. We are modeling very high-stakes and complex economics here. Rather, it’s meant to be a potential starting and focal point for various experienced market participants (including lawyers) to work with founders on.

Just as we are big believers in the thoughtful integration of elite legal industry values and lean tech values, we think an “open” startup ecosystem, with its enormous organic diversity of market players, is far healthier and more sustainable than misguided attempts to centralize everything behind a handful of rigid proprietary structures and tools. An open pro-forma model, together with our open-source contract templates that we’ve published here on SHL, is part of that vision.

In that vision, it’s not necessary that dozens of different actors come to agree on some “standard.” These templates and models will look extremely recognizable to all the serious law firms and other key players in the market. That alone saves time if startups or lawyers want to use them, and as institutions get more “reps,” efficiencies follow as institutional knowledge is gained.

We hope everyone – founders, lawyers, investors – will find this helpful, and welcome any feedback on improving it; particularly if “bugs” are found. As a final legal tech tip for lawyers, the ability to redline excel models, much like how you redline contracts, is super important and improves efficiency in reviewing model changes. Litera Compare is our favorite redlining tool for excel files.

As a separate tip for startup founders, if you need a 409A valuation, but don’t want to pay extra for a third-party cap table tool (because Excel is fine for now), Eqvista and Scalar have lean 409A-only (no extra software) offerings.  Some seed-stage companies go this route, combining Excel and a 409A valuation without the extra bells and whistles of the pricier cap table tools, until their cap table has grown more complex (typically post-Series A).

Finally, once you get to the point of needing to onboard to Carta or Pulley (if you’re successful, you will get there eventually), the following may be helpful for saving on their costs.

How Much Seed Rounds Cost – Lowering Fees and Expenses Safely

TL;DR: There are effective and efficient ways to lower your closing costs, in terms of legal fees and other expenses, for your seed round. But be mindful of the lean v. cheap distinction. A lot of founders myopically over-cut corners thinking that minimizing negotiation or deal structuring saves them money. This can easily cost 10-20x+ long-term in terms of economics (dilution) and governance power, because teams end up mindlessly signing terms against their interests. Thoughtful customization, combined with lean process and tools, gets you to a better outcome. Thinking lean – balancing flexibility, optimization, and efficiency – but not short-sightedly cheap, protects you from being penny wise but pound foolish.

Related reading:

There are two broad categories of costs for closing a seed round:

  • Legal Fees – Including whether you are using an incumbent “BigLaw” firm or a leaner boutique, and how you structure the round.
  • Post-Closing Expenses – Including state and securities filing fees, as well as 409A/cap table software costs

Seed Round Legal Fees

BigLaw v. Elite Boutique?

Without a doubt the two most significant drivers of legal fees are: (1) the type of law firm you are using, and (2) the round structure (contracts) you and your lead investors choose.  For a deep-dive on the “type of law firm” issue, see: Startup Legal Fee Cost Containment (Safely). In short, what has happened over the last decade or so is the incumbent Silicon Valley-based firms (BigLaw) have raised their pricing and grown so bloated (IMO) that they have simply overshot the needs of a huge segment of the startup ecosystem, especially at the earlier stages.

Granted, the market has historically not done a very good job of offering viable, credible alternatives to BigLaw in this space. What we’ve more often seen is (what I lovingly call) “shit firms” full of cheap but poorly-qualified lawyers, or peddlers of half-baked legal automation software that simply can’t handle the contextual nuances of high-growth companies. Lean but still elite boutique law firms, like Optimal (our firm), offer a more balanced package of highly-trained and credible professionals, including top-tier Partners, but lower costs derived from a more efficient firm operating structure.

To put this into more concrete numbers: a Partner in an incumbent “BigLaw” SV-based law firm will typically cost at least $900-1400 per hour, often more. At an elite lean boutique firm, the Partner will have an extremely similar background in terms of credentials, training, and experience, but be more like $450-650 per hour. Certainly not cheap – remember Partners don’t do most of the work in early-stage, they oversee things (quality control) and strategize with the C-suite and Board – but dramatically leaner than BigLaw. What allows leaner law firms to do this, while retaining top talent, is that they “burn” so much less money than firms built on traditional operating models. They can pay lawyers extremely well, but at lower rates.

Convertibles (Note or SAFE) v. Equity (Seed Equity or NVCA)?

The second big driver of legal fees in a seed round is the contract structure you and your investors use. Certain market players like to pretend as if this decision is very easy and simple, often because they make money nudging you in one direction, but it really is not that universal or clean cut.

Convertible instruments (convertible notes or SAFEs) are most certainly cheaper to close on and negotiate. Even within that category, however, there are key nuances. For example, whether there’s a valuation cap or not, whether that valuation cap is post-money v. pre-money, and of course whether you’re using convertible debt (notes) or SAFEs. Good reading on this: SAFEs v. Convertible Notes and A “Fix” for Post-Money SAFEs. These nuances can have enormously consequential (economically) impacts on a company.

While the big positive of convertible notes and SAFEs is speed and simplicity, their primary downside is uncertainty. They do not harden economics or governance rights the way that an equity round does, but instead deliberately punt on various hard questions to the future –  this is precisely how they simplify things. In many cases, this is a feature and not a bug, but not always. A huge number of startups are feeling these downsides in this heavy post-pandemic post-ZIRP economic downturn that the ecosystem is experiencing.

So many founders drank the “click click close” kool-aid suggesting that seed rounds are all “standard” and they should just sign YC’s default post-money SAFE. The main peddlers of this perspective were specific investors, who profited from pushing a contract structure designed for their economic interests, and automated financing companies who need you to not negotiate your deals, and believe it’s all “boilerplate,” so that you can let their software tool close everything for you. Obviously, automation software breaks down when confronted with any meaningful level of flexibility or structure nuance.

Now that these startup teams need to raise more money in hard times, they’re feeling the pain of having failed to do a bit more negotiation up-front, including by hardening investor economics when valuations were higher instead of simply relying on a moving valuation cap with no floor. The harsh anti-dilution mechanics of YC’s default SAFE are also imposing significant dilution on founders, whereas if they had just done a tad more thinking and structuring up-front they could’ve saved themselves potentially tens of millions of dollars worth of dilution. Losing millions in dilution in order to save a few thousand in fees is a perfect example of penny-wise, pound-foolish judgment.

See Myths about Seed Equity Rounds for a deep-dive into when equity, instead of a convertible, can make sense for your seed round. Choosing a simplified “seed equity” structure, instead of the longer, more complex NVCA-based equity deal contracts, can save tens of thousands in legal fees, and safely (without material hidden risks). You and your counsel will just need to get your investors comfortable with it, if possible.

Concrete Legal Fee Numbers:

If you’re using a lean elite boutique law firm, closing a convertible note or SAFE round is at most a few thousand dollars in legal fees ($2.5K-$5K). A little more if it’s heavily negotiated, but rarely more than $10K. BigLaw, with often double the rates, will naturally be more. This is for company-side costs. Investors usually pay their own fees in convertible rounds.

For simplified seed equity (not NVCA), a more typical range from a boutique law firm is $15K-$25K if we’re thinking of a 10%-90%-ile range, with below that range being zero negotiation super-fast closing, and above that range being when more heavy negotiation or cleanup diligence issues are involved. Again, BigLaw with its higher rates is probably twice that.

Some VCs will insist on structuring “seed rounds” in the exact same format as a Series A, using NVCA-based forms. This adds significant complexity and drafting time, as it’s a rejection of the simplified seed equity structure. For this structure, with a lean boutique a reasonable 10/90 range is $25K-$45K assuming the round is $4-6 million-ish raised. A larger round closer to $10M+ or higher may be closer to $50K due to more legal work demanded by the VCs, and will look more like a Series A. Again, BigLaw’s rates will drive that higher if you go that route. Often 2x. But importantly, a small minority of seed rounds are structured this way, as using this structure is more a response to a particular fund’s idiosyncratic preferences, and not some inherent necessity of seed financing.

Only perhaps 10-15% of these cost ranges boil down to what might be called “administrative” work – paralegal-esque mechanics like coordinating signatures, inputting numbers, etc. The real drivers are high-impact legal work of negotiation (including educating executives and Boards), structuring, drafting, and integration of the “code” (contract language) for the deal and planned corporate governance arrangement.

Sidenote to law firms: See Legal Tech for Startup Lawyers for some experienced advice on helpful software for reducing administrative time on financings. 

The key takeaway is how much seed rounds cost to close is heavily driven by the type of law firm you’re using, and the contract structure. My point here is not to pretend there is some formulaic, straightforward answer as to what any particular company should choose. It depends on context. My suggestion, however, is that founders actually act like executives and exercise some judgment – weighing the pros and cons, balancing flexibility v. speed, negotiation v. automation – instead of biting into X or Y peddler’s nonsense as to whatever a “standard” seed round looks like. We’re talking here about selling 10-30% of your cap table. Don’t be a myopic fool.

Other Seed Round Expenses

While not as meaningful as legal fees, there are a few other expenses that still impact the bottom line in a seed round. State filing fees, along with securities filings, can run you anywhere from $750-2,000 as a 10/90 range.

Carta or Pulley?

Higher than state or filing fees will be the cost of adopting capitalization table software and getting a 409A valuation; the latter of which is usually recommended if you intend to grant options after closing your round. Before a seed round, adopting any kind of cap table tool apart from MS Excel has always struck me as pointless. At under 10-20 cap table stakeholders, it’s not hard for a competent team, in collaboration with competent counsel, to maintain a spreadsheet. In fact, when very early founders introduce third-party cap table software into the mix, I sometimes see more mistakes, not fewer ones.

Historically, Carta has been the big incumbent player in this space, and deservedly so. But as is the case with many incumbents, there are growing concerns in the market about feature creep and excessive (rising) pricing. Sentiments like:

A big concern among law firms and VCs has been that no other leaner alternatives seemed to be gaining sufficient market share to counteract the network effect advantages that Carta has. But from what we’ve been observing, Pulley (Founders Fund Series B-funded) appears to be reaching a threshold where, at a minimum, founders need to be aware of them as a significantly less costly and simpler cap table + 409A option to the tune of thousands of dollars per year. Most serious law firms in this space are growing comfortable and familiar with it. Its simpler, more focused interface is certainly helpful.

We also published The Open Startup Model for founders who (understandably) want to avoid the cost of a third-party capitalization tool entirely until later in their company’s trajectory. A lot of lean companies get by just fine during seed stage, and sometimes even Series A, relying on a simple but well-organized excel model.

Summary

All smart founding teams are rightfully concerned about not over-spending to close their seed funding. But there’s a lot of opaque, and sometimes patently false, information available in the market as various commentators “talk their book” instead of laying out all the factors honestly.

On legal fees, law firm type and deal structure are big drivers. For the former, it’s BigLaw v. elite boutique. For the latter, the decision matrix is multi-variate. If convertibles: SAFE or Note, and within those categories, type of valuation cap. If equity: simplified seed equity or NVCA. Where you land on deal structure has millions of dollars in implications long-term. Take the time to exercise real judgment on this issue. Remember: lean, not cheap.

On post-closing cap tables and 409As, Carta is the quite expensive but solid incumbent, and Pulley is the increasingly attractive lean alternative. Assess both. Also consider just leaning on an Excel-based cap model.

Good luck.

Post-Money Valuation Cap Convertible Note Template

Link: Post-Money Valuation Capped Convertible Note Template

See also: Seed Round Template Library

Post-money (as opposed to conventional pre-money) valuation caps have become more of a thing in early-stage startup convertible rounds. The primary benefit of a post-money cap is that it makes it clearer to investors what percentage of the cap table they are purchasing as of the day of their investment, because the “all-inclusive” valuation cap incorporates all SAFEs and/or Notes the company has raised, even if they haven’t been formally converted or modeled on the cap table. In pre-money caps, what you are buying is more ambiguous.

The extra transparency of post-money caps can be a very good thing. But as I’ve written before, and many others have pointed out, the default post-money SAFE that YC published a few years ago had a very anti-founder “gotcha” built into it. Not only did it commit to a specific % of the cap table today, but it also gave investors aggressive anti-dilution protection for any future dilution from more SAFES or Notes, all the way until an equity round in which everything converts. Tons of companies have gotten burned by this, not understanding that YC’s Post-Money SAFE structure forces the common stock alone to absorb all dilution until SAFEs convert. This is way worse economically than other financing structures for early-stage.

Frankly, YC’s decision to make its SAFE instrument so investor friendly was surprising, even acknowledging that they, as investors, surely have benefited financially from it. Giving post-closing anti-dilution protection to SAFE investors isn’t necessary at all to give them the real primary benefit of a post-money cap, which is clarity as to what they are buying today. If I’m investing into a company that already has raised some SAFEs or Notes, I surely would like a hardened commitment as to what post-money valuation I’m paying for today, but I don’t see why I should expect protection from future dilution. For that reason, we published a “fixed” post-money SAFE template. With a few added words (clearly reflected in track changes for transparency), it “fixes” this anti-dilution problem in the YC template.

Acknowledging the benefits of even a “fixed” post-money SAFE, the truth is a lot of investors around the world, and in the U.S., still aren’t comfortable with SAFEs. They think SAFEs generally skimp too much on investor protection. For example, particularly in a down market like today, some investors would prefer the debt treatment of a convertible note. Even in 2023, we still see quite a few deals closed on convertible notes instead of SAFEs. I represent exactly zero VCs or tech investors, and what I’ll say on this topic is that in reality the differences between SAFEs and Notes are not super material; and never worth losing funding over them. Go with whatever works, and just make sure you have good advisors to protect you on more material points.

Most convertible notes I see today still use the older-style of pre-money valuation cap. There’s no reason why founders, in choosing to raise on a convertible note, should be stuck only with pre-money valuation caps, given that, as I described above, there can be very good reasons for using a post-money structure.

For that reason, I’ve taken the convertible note template that’s historically been publicly available here on SHL, and made a post-money valuation cap version. The benefits of a post-money valuation cap’s clarity, but under a convertible note structure. Just one more potential template to leverage in closing an early-stage round. Importantly, it does not have YC’s harsh anti-dilution mechanisms built in. The purpose of this post-money cap is to reassure investors as to what they are investing in today. There is no promise of anti-dilution for future fundraises because, in my opinion, there shouldn’t be.

The usual disclaimers apply here. This is just a template, and it is intended for use with experienced counsel. I am not recommending that founders use this template on their own without experienced advisors. If you choose to do so, do not blame me for any negative consequences.

Related recommended reading: Myths and Lies about Seed Equity. As useful as SAFEs and Convertible Notes are for simple early-stage fundraising, my impression is that they tend to get over-used, sometimes in contexts when an equity round really makes a lot more sense. Make sure you understand the full pros and cons of an equity round, including potential “seed equity” structures that are simpler and cheaper to close than full “NVCA” equity docs. A lot of the over-use of Notes and SAFEs stems from myths and falsehoods often shared in the market about equity deals.

Milestone-Based Valuation Caps for SAFEs and Convertible Notes

TL;DR: When it’s difficult to get aligned with investors on the appropriate valuation cap in your Convertible Note or SAFE, having a tiered milestone-based valuation cap can be a reasonable compromise. If you hit the milestone, you get the better (for the company) deal. If you don’t, investors get the better deal. But avoiding ambiguity in the language is key.

Related Reading:

Equity rounds, including simplified/leaner seed equity, have always been preferred by founders for whom “certainty” over their cap table is a key priority. Equity allows you to lock in a valuation and certain level of dilution, which is often an optimal strategy in boom times when valuations are very juicy; though of course over-optimizing for valuation alone, to the exclusion of other factors (like liquidation preferences, governance power, investor value-add, etc.) is never a good idea.

But as of right now (December 2022), we are definitely not in boom times. The startup ecosystem has seen a dramatic contraction in financing activity, and uncertainty over valuations has taken over; with investors demanding that they move lower, and entrepreneurs struggling to accept the new reality.

Convertible securities (Notes and SAFEs) have always had the benefit of being more “flexible” and simple than equity. They have their downsides for sure, but in many contexts when speed-to-closing is important, and fully “hardening” a valuation is not possible, they make a lot of sense. But in times of maximal uncertainty, like now, even agreeing on an appropriate valuation cap can be tough. You believe you deserve more, but the investors, often citing all the apocalyptic data, say you’re being unrealistic.

A milestone-based valuation cap can be a good way of getting alignment on a valuation cap, especially if you’re highly confident in your ability to hit that milestone, but you have no credible way of getting an investor today to share your confidence. Investors tend to like valuation caps because they are asymmetrically investor-friendly – if the company performs well, the cap limits the valuation, but in a bad scenario, investors get downside protection (lower valuation at conversion). A milestone-based cap is a way of making the cap’s “flexibility” a bit more symmetrical, with upside for the company if it outperforms.

A milestone valuation cap would say something like (paraphrasing): “If the Company achieves X milestone by Y date, the Valuation Cap will be A. If it does not, the Valuation Cap will be B.”

Simple enough, but as always the devil is in the details. When using a milestone valuation cap, you want to minimize ambiguity and the possibility of disagreement in the future as to whether the milestone was in fact achieved.

Bad milestone language: “The Company successfully launches an alpha product to market.”

What do you mean by “successful”? In whose opinion? By what date? What constitutes a “launch”?

Better milestone language: “The Company’s product/service achieves at least 10,000 daily active users by [Month + Year], with such metric to be calculated and reported in good faith using a consistent methodology determined by the Board of Directors in its reasonable discretion.”

Not 100% air-tight – it can often be unproductive to over-engineer the language, and too much distrust between investors and management as to calculating the milestone is a bad sign – but still far clearer and less subject to disagreement than the first one.

If you find yourself cycling in discussions with investors over what the “right” valuation is for your seed round, consider committing to a milestone-based structure as a way of (i) getting alignment as to what “success” looks like post-close, and (ii) bridging the “confidence gap” between the founding team and the money.

A Fix for Post-Money SAFEs: The Math and a Redline

TL;DR: The default language of a Post-Money SAFE has the worst possible economics for founders in the vast majority of seed round contexts, because any future convertible rounds (that aren’t equity) force dilution entirely on the common stock (seed investors aren’t diluted at all – YC benefits significantly from this language in its own investments). A very small tweak to the language can save founders/common stockholders millions of dollars, and make the Post-Money SAFE fairer to the cap table.

Background reading: Why Startups Shouldn’t Use YC’s Post-Money SAFE

First, a very quick review of the high-level economic problem with the Post-money SAFE structure that YC promoted a few years ago; and which is only in recent quarters becoming more visible to founders as their seed rounds start to convert:

The stated value proposition of the post-money SAFE, relative to the traditional pre-money SAFE, was that it delivered investors far more clarity over how much of the cap table they were buying. If they put in $1 million on a $10 million post-money SAFE, they were buying 10% of the company today, regardless of what the current cap table looks like. This is actually a good thing. Clarity is great.

The hidden value proposition for investors of the post-money SAFE, and which has cost founders enormously by not understanding its implicationswas an extreme level of anti-dilution protection built into the post-money SAFE. Any SAFEs or notes that you issue after the post-money SAFE round, but before a Series A, do not dilute the investors; they dilute only the common stock (founders and employees). This is the case even if the 2nd or 3rd round of SAFEs is an up-round with a higher valuation cap.

This was and remains crazy, and totally unnecessary in light of the stated purpose of post-money SAFEs; which was for investors to know what they are buying on the day of their closing. When you buy equity you are able to calculate the ownership you are purchasing at closing, but equity rounds virtually never, not even in the most investor-slanted deals, have full anti-dilution protection for post-closing investment. Why should Post-Money SAFEs give investors that? They shouldn’t, and this was an egregious (but in my opinion, deliberately obfuscated) over-step in startup financing template design.

We posted here a very simple redline (in track changes) of what needs to be edited on YC’s post-money SAFE to eliminate the terrible anti-dilution mechanics. Again, it’s worth emphasizing that this redlined safe still gives investors the stated benefit of the post-money structure, which is to know what % of the cap table they are getting as of their closing. What it changes is that it makes post-closing issuances proportionately dilutive to both founders and investors, just as they would (and should) be in any other kind of financing structure.

There are numerous different ways someone could draft a “fix” to this problem. I’m just posting a simple public redline so founders, lawyers, and investors understand the problem, and can either go with this solution, or craft a variant that works for their context.

A colleague of mine also designed a very helpful model (in Google Sheets) breaking down the mathematical (economic) differences between a typical pre-money SAFE, post-money SAFE, and our suggested redlined post-money SAFE. We know engineers in particular love seeing the numbers.

To give a high-level idea of the economic implications, assuming the following:

SAFE Round 1: $5M pre-money cap or $6.5M post-money cap ($1.5M invested)

SAFE Round 2: $10M pre-money cap or $12M post-money cap ($2M invested)

Series A round: $25M pre-money, $31M post-money ($6M new money), 10% post-available pool.

In Series A dollars (company value as of Series A closing), common stockholders lose $912,000 in moving from the traditional pre-money SAFE to YC’s preferred post-money SAFE. Fast-forward to an exit years later, and you’re talking easily millions or even tens of millions of dollars in lost value from simply changing the template.

Again in Series A dollars, common stockholders gain appx. $1.2 million in using the redlined post-money SAFE relative to YC’s post-money SAFE. The addition of just a few extra clarificatory words (which eliminate the hidden anti-dilution protections for investors) shift $1.2 million in Series A value from investors to the common stock; which again could easily be >$10 million by exit. All with just a few tweaks of language.

If this isn’t clear already: the stakes here are extremely high. And anyone suggesting that mindlessly using an investor or accelerator’s preferred templates is “saving” founders money (by reducing legal fees) is either hilariously uninformed, or lying out of their teeth. Tread carefully, and stay well-counseled.

Disclaimer: The model presented above is purely a hypothetical based on general math mechanics of SAFE and Series A rounds. The specific outcome in your company’s case will be dependent on the facts and circumstances, and you should always use experienced, trusted advisors to avoid missteps.