In general, Alchemist recommends using the existing market standard SAFEs issued by YC. The advantage of using these SAFEs is they are considered market standards. So they will streamline the time required for legal diligence an investor will have to do on the docs. And they are considered standard. So this makes fundraising easier with angels – angels just need to agree on the amount of investment, and you are good to go.
However, some of the YC SAFEs have become less founder friendly over time, and we do make one important modification to the YC SAFEs which I detail below.
Which SAFE to use? If you are in a position of strong demand (e.g. you have more than 12 months of cash and/or have high confidence in investor interest), the most founder friendly SAFE is the MFN, No Valuation Cap, No Discount.
If you have moderate demand (e.g. more than 9 months of cash and hitting all of your execution targets), the Discount, No Valuation Cap is the next founder friendly SAFE.
For most Alchemist companies, the standard SAFE to use is the Valuation Cap, No Discount model. If you have less than 9 months of cash, or in a market where investor demand is not a guarantee, this is the one to use. The Alchemist method here is to raise enough on this cap to dilute by 5% then increase the cap by 50%. That is, you could raise $300k at a $6 million cap, then increase the cap to $9 million, and raise $450k at $9 million (for the first investor at the $9 million – if they balk at the cap increase – split their money between $6 and $9 so that at least part of their check comes in at $9 million). Alternatively, you can dilute by 10% and then double the cap –e.g. Raise $600k at $6m, and then double to $12 million.
HOWEVER, for the Valuation Cap, No Discount model, as the YC SAFE stands right now, the SAFE does not dilute by subsequent SAFEs. What this means is say you raise $600k at a $6 million SAFE from Investor A. Investor A owns 10% of your company. Then let’s say you raise $1.2m at a $12 million SAFE from Investor B. That $1.2 million should dilute everyone by 10% – e.g. Investor A should now own 9% not 10% of the company. But the way the YC SAFE is worded Investor A will not dilute by Investor B.
To fix this, you need to change “Includes All Converting Securites” to “Excludes All Converting Securities” in the Company Capitalization section of the SAFE. We have done so in the “Alchemist SAFE” here (everything else is the same except for this one modification.)
If you get push back on the SAFEs, the first thing we recommended giving on is the discount. The discount rate does not apply in a Capped SAFE if you raise at / above the SAFE cap plus the discount. So assuming you price your equity raise high enough, the discount won’t come to play.