Startup founders: how to determine terms of SAFE note?
First time founder here. I have an angel investor interested in investing in my startup and we are talking next week about the terms of his investment. He told me the dollar amount he wants to invest and told me to come up with some terms to propose to him. I don’t want to do a convertible note because it seems complicated. I am thinking to propose a 15% discounted SAFE note just to keep it simple. I have absolutely no idea what the valuation of this startup would be because it’s so early. How should I go about figuring this out?
Seed is a bit of a crapshoot. First piece of advice is to come up with a fundraising plan. If a million dollars fell out of the sky tomorrow and you had to spend it on your company, what would have the highest impact? If you can't answer this question in detail, then you're not ready to raise. For coming up with specific terms, it helps to have a specific plan. Start with what you want your outcome to be and then work backwards from that. Say you want to launch to some market segment in 6 months, after which you expect to show traction/PMF. What do you need to get to launch? What do you need to build? How many engineering weeks is it going to take? How much marketing? Do you need salespeople? How about hosting costs? Try to come up with costs for all of this stuff, and then multiply by 1.5 because you're probably grossly underestimating. Once you have that number, you know how much you need to raise. After that, you can sort of back into the valuation. It's bullshit, but there's literally no other way to value the company because you have no rev, no product and no team. My final advice to you is to get a trusted mentor ASAP. A good mentor is someone who might have successfully raised money for a company before. You know the details of your situation best but it really helps to have someone you can ask for help privately and without fear of judgement. If you're the CEO, this stuff is life and death for your company. If you go into a negotiation unprepared VCs will ghost you and then you lose their money forever. Even worse, you can raise money on crappy terms they will take your company from you and you will be toiling for someone else for no upside or they will chuck you out. Good luck!
Thanks for the detailed reply! I’ve actually already done exactly as you suggested where my cofounder and I calculated all the costs and that’s how we determined the amount of money to raise right now for the first 6 months to do our mvp and get some initial traction. But still, the costs are totally unrelated to the valuation, costs now don’t predict future revenue streams. So i understand SAFEs are the way to go when a valuation can’t be determined. I’m just curious about how people go about deciding the terms of a safe (discount and cap) when there’s such little info.
And thanks for the eerie warnings about being prepared for negotiations. I will heed them
No problem dude. When we did our round the first people we raised money from had a standard term sheet and when we took it our mentor they said it was probably ok. We used that to negotiate the rest of the round. So I don’t have much direct advice I guess, sorry.
So you just took whatever terms the investor requested?
Hire/partner with someone who knows this stuff. As a founder, you need to learn the art of recognizing your weaknesses and hiring/partnering with right resources to take the company to the next level.
True. I have been asking people, just curious if anyone on Blind with experience would give any pointers