Do You Understand Startup Funding Documents?

Understanding the documents you'll be asked to sign — or offer to investors — is essential before you start fundraising.

Convertible securities

Convertible securities are investments that convert into equity at an event specified in the investment documents. For example: when $1M or more is raised in a priced round, the investment converts to equity at the predetermined valuation cap.

SAFE — Simple Agreement for Future Equity

Introduced by YC in 2013, a SAFE is not a debt instrument and is not meant to be paid back. It typically has a valuation cap and a discount rate, and is generally the least expensive funding structure from a legal perspective.

Important caveat: A SAFE only pays off for investors if the company raises a subsequent priced round. If that round never comes, investors get nothing back. TopTal is a cautionary example — they never raised another round after their SAFE, so early investors never got their money back.

Convertible note

A convertible note is a debt instrument — technically a loan — that is not meant to be paid back, but can be at the investor's request. It has an interest rate, typically a valuation cap and a discount, and is a longer-form document with more investor protections than a SAFE.

Caveat on convertible securities

Set a minimum investment amount — $50k is a good target. And avoid raising at too many different caps and discounts.

Why? As caps and discounts multiply, it becomes increasingly difficult to know your true ownership as a founder, and the conversion mechanics at a priced round become chaotic and expensive to sort out.

Priced round

A priced round is an offering and sale of newly-created stock at an agreed-upon per-share price. It is more complex and expensive to execute than a SAFE or note.

• Typical legal cost for a priced seed round using standard documents: $12k–$20k
• Costs can be higher if there is significant clean-up required from multiple prior SAFE or note rounds