The Gust Launch SAFE is available in only one variety: discount, no cap. To improve on traditional SAFEs, Gust Launch SAFEs introduce a concept designed to combat founder dilution, which we call “rollup”: if a startup issues a Gust Launch SAFE and subsequently issues a convertible note, the principal investment of the SAFE will transfer to the convertible note round at the same terms as the other convertible note holders. The SAFE investors will then become convertible debt holders. On the other hand, if the startup never issues a convertible note before its first preferred stock round, the SAFE’s investors will still convert their stakes to preferred shares at a 20% discount.
In keeping with the original purpose of SAFEs, earliest-stage investors (friends, family, and angels) can invest in the startup easily and simply, keep transaction costs low, and benefit from a discount on preferred stock in a future round. Unlike the standard SAFE, though, Gust Launch SAFEs protect the founders from the equity overhang and reduce the dilution effects that a convertible waterfall may cause.
Here’s how a Gust Launch SAFE works:
There is no valuation cap. If investors insist on a valuation cap, the startup should use our convertible note instead.
The discount rate is set at 20%. This is overwhelmingly the industry-standard discount rate for both types of convertible agreements.
Each investor must be accredited as defined within Regulation D of the Securities Act.
At issuance of a later convertible note, the SAFE’s investors will be converted to holders of the convertible note, subject to all the same terms as the holders of that note—avoiding undesired founder dilution.
Unfortunately, the rollup benefit only applies if all of a company’s SAFEs are issued through Gust Launch: if only some of a company’s SAFEs allow rollup, rollup can’t mitigate the note stacking effect as designed, especially if the startup conducts a convertible note round before its first preferred stock raise.