Geoff Ralston: I would like to introduce Kirsty, who is going to talk, in much detail about safes, notes, equity and the like. Kirsty.
Kirsty Nathoo: All right, good morning everybody. So my name is Kirsty Nathoo. I'm the CFO, one of the partners here at YCombinator and I have now worked with probably over 1500 companies in terms of getting them incorporated, doing a YC investments and then seeing them through their subsequent raises, either on convertible instruments or on equity rounds. I've seen kind of a lot by now, and so this presentation is to give you some understanding of some of the things that people don't necessarily understand when they're raising money and to hopefully help you avoid some of the pitfalls that we've seen with ... Some of the mistakes that we've seen founders make.
The key message in all of this presentation is that it's important that you understand at all stages of the company's life cycle, how much of the company you've sold to investors, and in connection with that, how much therefore, you also own.
The thing that makes this complicated is that most companies will raise money on convertible instruments first, and because those convertible instruments aren't yet shares, is not immediately obvious for a lot of founders, how much of the company they've sold. I'm going to talk through some of the mechanics of that and help you understand how all that works, so that you don't get surprised when it's too late and you can't do anything about it.
The other thing that you should also be aware of is that a lot of companies and a lot of founders will just say, "Oh, I don't need to worry about my cap table. My lawyers deal with my cap table. I don't need to worry." Actually, that's a really dangerous statements. Again, you should make sure that you're understanding this. It's your responsibility as the CEO or the founder of the company to understand all of this.
There's lots of ways that you can maintain your cap table.
There's lots of ways that you can keep track of this, and the simplest form is just a spreadsheet. All it's going to show us who owns how many shares and that's it. That's all you need at the beginning, but there are other services out there that can help. I'll, include them on a list of, of resources after the presentation, but there's tools like captable.io and Carter, which also help for you to keep track of these things.
These are the three sections that I'm going to talk about. First of all, I'm going to talk about safes. Particularly for US companies. Most companies will raise money first on safes or some other convertible instruments, which I will talk about briefly as well.
And I know Jeff mentioned the safe last week in a little bit of detail, but I'm going to go into much more detail on that and also how the sections of the safe works.
The S stands for simple and so hopefully you will believe me with that, and you will be ready to understand what's going on in that safe as you come out of this presentation.
Then we'll talk some more about dilution again so that you can see we're going to walk through the lifecycle of a company from incorporation up to raising a priced series all round, so that you can see how things change over that period.
And then I'll give you some top tips on other, other items to do with raising money. All right, so first of all the safe. So let's cover what it is and then we'll go through the details of how a safe is built up. As I said, safe, the S stands for simple, the rest of it is a Simple Agreement for Future Equity and put simply, it's a instrument where the investor will give you money, now, in exchange for a promise from the company to give shares to the investor at a future date, when you raise money on a priced round, There are minimal negotiations with a safe. Really, there's only two things that you probably going to negotiate with the investor, which is how much money you going to ... How much money the investor will put into the company and at what valuation cap. Really those two things are the things to negotiate, whereas when you compare that with a priced round, there's a whole raft of things to negotiate, and that's what makes the priced round a lot harder to close and to raise money on them than a safe does. That's why often companies will start with a safe and then when they get to the point of being able to raise more money, and they have a lead investor, which that negotiate with for the priced round, then the safes, when they convert into shares, will piggyback on the terms that has been negotiated with the lead investor in the priced round.
The other thing to bear in mind is that a safe is not debt. Some of you will have raised on what's known as convertible debt. That's a different instrument. Debt has generally an interest rate attached to it and it has a maturity date, where the debt needs to be repaid. Safes have neither of those things. So it's important to understand that there is a distinction between the two instruments, but in terms of conversion, in the way that they convert in a priced round, there are some similarities. This is the first section in the safe and this paragraph, actually includes pretty much all the key details that you need to understand in a safe. It talks about in exchange for payment by investor, you're going to be investors putting in a certain amount of dollars around the date and down here, the valuation cap is some number. Really those two blanks are the two negotiating points. This paragraph here is something that we've added just recently in our newest version of safes and this is something that will hopefully help you so that once you've read our safe that we have available on our website, once. If there's this paragraph on the safe, then you know that you have read the safe.
The idea behind this is that if anything changes in the safe, either the company or the investor cannot say this paragraph. It can't say that it's the same as the safe that's on the YCombinator website, and so you'll know as a founder that you should be looking at it more closely to see what's been changed. This is just something to keep your eyes open for if you receive a safe from an investor. Okay. So the anatomy of the safe is pretty straightforward. It's only five pages in length, so it's not very long. We tried really hard to keep the language not too legal, so it's easy to understand and really it split into five sections. Section one talks about what happens in a various different sets of events. Most of the time what's going to happen is there will be an equity financing at some point in the future, and so the first part of the section talks about what happens then, how does the safe convert? Or there might be a liquidity event, either the company might get sold before the safe converts. So it's also addresses what happens if the company is sold whilst the safest still outstanding. Or the company might decide to close down whilst the safe still outstanding, so it also addresses that. Those are the three real key events that might drive change from the safe, so it addresses all of those. Often we get questions from founders or from investors saying, "But what happens if?" Actually these three sections are the answers to pretty much all of those questions.
Then there's a couple of other sections where we clarified the liquidation priority, which just means who comes first in the queue to be repaid in these different situations. Also clarifying that the safe actually terminates; i.e, it does no longer exist if any of the top three events happen. So that section is kind of your instruction booklet. If something happens in your company, that's the section you look at to see what happens to your safe.
Then the next section, section two is just the definition section. So anything that we referred to within the safe will be explained in section two. If you're not sure what the company capitalization definition is, you go to section two to look at that for an explanation. Section three are the representations that the company makes to the investor. So it's saying things like the company is duly formed. It's correctly formed in Delaware. Section four is the representations that the investors make to the company. So it's things like the investor saying, "Yes, I agree I'm an accredited investor." Then section five is kind of legal boiler plate language that needs to be in there. Really from your point of view, the sections that you really need to understand are sections one and sections two. Obviously you need to know what you're representing in section three as well, but those section one and section two, are the key key parts, and that bit is only three pages long of the safe. I'm pretty sure you can all read three pages and understand what's going on. I encourage you to do that. Some of you may have heard, in the last couple of weeks, we announced to move to a different type of safe. We've introduced concept of post money safes, and it's important that we understand what post money means. What it basically means is after all the safes have converted, what happens at that point, and we'll go into that in a little bit more detail in a moment, but it's easy to get confused about what post money means here, but it's after all the safes.
The reason why we introduced these is that we wanted to make it easier for founders to understand the dilution that they were taking; i.e, how much of the company they'd sold to investors and so how much less of the company they owned. It's a lot easier to to understand that with post money safes than with the previous safes that we had, which were known as pre money safes. Basically, when we're talking about pre money and post money, we're talking about the same thing. It's just a different way to express it, to explain it. In both a priced round done for safes, the formula stays the same. So the pre money valuation plus the amounts of money raised, equals the post money valuation of the company. So if you have a $5 million pre money valuation and you raise a $1 million, then the post money valuation of the company is $6 million. That's important to remember in a moment, but really, that's as simple as it gets.
Then based on that, so that you can understand how much of the company you sold when you're raising money on safes. The formula is just your ownership or the ownership of the investors, the ownership that the investors will take, is their amount raised divided by the post money evaluation in the case of a priced round or valuation cap in the case of a safe. So in our example before, if the investors we're putting in $1 million and the post money valuation was $6 million, then they will own 16.67% of the company. Does that all make sense to everybody? So far? Okay, good. I'm going to talk only about safes with valuation caps here to keep things simple, but just be aware that there are other different flavors of safes that you can use and that you may have already used or that you may find that you use in future. So the, maybe the concept of a discount instead of a cap. Instead of capping the valuation that say $6 million, it says, there's a, there's a 20% discount on the series a price.
There's also an uncapped safe, which basically just says, "I'm going to put money in now as an investor, and when you do a priced round, I'll get the same price as the priced round investors are going to get." That's pretty uncommon because the investors who are putting in money early, want some kind of bonus for putting in the money early. It's pretty unlikely that you'll, you'll use one of those. Then finally there's a safe uncapped with a most favored nation clause, which basically what that says is, "I'm not going to agree a cap right now, but if you raise some money from some other investors, who do have a cap and that's how those terms are better than my terms, I get their terms as well as an investor." This one can sometimes happen if you're raising money very early on and you don't really know what the cap is and maybe you just want to punt it for another month or two, but it just creates a little bit more admin for the founders because it's another thing that they have to keep track of. We see them sometimes, again, not all that common. By far the most common is just the valuation cap only. All right, so now we understand safes and how they're made up. We're going to talk about dilution and understanding how your cap tables work. All right, so we're going to walk through this process. So we're going to start with our company, its incorporation, which Carolyn talked about right at the start of the startup school course I believe. So hopefully this will not be anything new to you.
Then we're going to talk about what happens when you raise money on safes, some post money safes.
Then we're going to talk about what happens as you hire people and start to issue equity to employees, and then the company is going to do a price round, and so what happens to the cap table at that point? Now I'll warn you, this is starting to get into the math section of the whole thing, so turn your brains on and keep concentrating. All right, so incorporation. So let's just assume it's a really simple company.
There's two founders and they split their shares equally between the two of them. So in this example, each founder owns 4.625 million shares. So there's a total of 9.25 million shares issued, and each founder owns 50%. That's pretty straightforward, right? At this point, in order for them to own those shares, the founders have done the paperwork, they've granted those shares through a restricted stock purchase agreement and this vesting on those shares, as was talked about with Carolyn earlier in the course. Then the next thing that's going to happen is this company raises some money on a post money safe and they raised from two investors.
The first investor comes in quite early and they put in $200,000 at a $4 million post money valuation cap. Then a little bit later on investor B comes in, puts in 800,000 at an $8 million post money valuation cap. So if you remember back to our formulas, the ownership that investor A has at this point, is there amounts of money that they've put in divided by the post money valuation cap, which gives them 5% of the company. Same for investor B, 800,000, over 8 million, which gives them 10% of the company. So in total, the founders at this stage have sold 15% of the company. So even though this doesn't change the actual cap table, because these aren't shares at this point, this is just a safe. This is just a promise to give shares in future.
The founders should know at this stage that they have sold 15% of the company, and if they sold 15% of the company, then they can no longer own 100% of the company. Now instead of the foam does owning 100% of the company, between them, they've been diluted by the 15%. So they're going down to 85% of the company. It's important to have that in your brain when you're raising money, because whilst the cap table, like I say, doesn't change, the fact that you've just sold 15% of the company, is an important fact. It's an important thing to know because you want to make sure that you're not selling too much of the company, because you know that there's a lot of future fundraisings that are going to happen with the company.
Therefore there's going to be more future dilution. Is everyone happy with how we've got to that 15%? Yes.
The question.
Audience: The founders are the only ones getting diluted at this point, earlier investor doesn't get there?
Kirsty Nathoo: Right. So the question is this, it's only the founders that are being diluted at the moment and, yes, that's exactly right because that's the construct of the pot money safes.
The later safe investors don't dilute the earliest safe investors. It just dilute the existing shareholders, and at this stage, it's just the founders who are the existing shareholders.
Audience: Does it make sense to buy shares in the treasury so that they can anticipate a dilution?
Kirsty Nathoo: Okay. So the question is, does it make sense to have shares authorized [inaudible] I think is what you mean. At this stage it doesn't necessarily make a difference as you'll see in a moment. You actually create new shares that you're going to issue to these safe holders when they convert. At this stage is, it's fine to just have the shares that the founders have and maybe some that you want to give out for hiring,
Audience: Why investing, he has different post money valuation cap?
Kirsty Nathoo: So the question is why do they have different post money valuation caps? In this example, it could be for very any number of reasons, but in this example, we're assuming that, this one happened maybe a month after incorporation and maybe this one happened six months after incorporation and more has gone on in the company and so it's slightly less risk and so the company has been able to negotiate a different cap. Things changed through the company and it's totally fine to have different caps because as you can see from here, you just calculate everything separately and then add it all together. So companies raised a million dollars. First thing is probably going to do with that money is hire some people and when you hire employees, you're probably going to give them some equity. In this example, the company creates, at this stage a option pool, otherwise known as an ESOP or an employee incentive plan.
There's lots of different names for it. In this example, they have created a plan or a pool that has 750,000 shares in it and they've issued out of their 650,000 shares to early employees. This has now changed cap table because they've issued shares.
The fact that, that this more shares being being issued means that the cap table changes because we now have more shareholders. Now we have a total of 10 million shares that have been ... Fully diluted basically means the combination of issued and set aside in the option pool in this case. So now we have our founder's, instead of owning 100%, have 92.5% of the company, and the option plan in total is 7.5% of the company. But remember those safes.
These founders don't actually have 92.5% because they have also sold 15% of the company. Actually, they own less than the 92.5%.
They actually own 85% of that, which is about 78.6%. So again, this is where it gets dangerous for the founders. If they forget about the safes, the founders are sitting there saying, "Well, I own 92.5%, this is great. I own still loads of the company," and they have forgotten about the safes and the dilution they're about to take from that. Again, it's really important to keep track of how much you've sold on your safes so that you can do that calculation and say, "Actually, I don't have 92.5%, I have 85% of that because I've sold 15% of the company," but is also these numbers have been diluted by those safes as well. As you'll see in a moment, these numbers change as well. Now we go into fast forward about let's say a year. The company is doing well, it's raised the priced round and it has a term sheet for the priced round, which says that the pre money valuation of the round is $15 million and they're going to raise a total of $5 million of which the lead investor, which is the investor that they do all of the negotiations with, is going to invest $4 million. If you remember from our formula at the start, the post money valuation is the pre money valuation plus the total raise. So the Post money valuation is $20 million.
The other thing that gets negotiated as part of the priced round is the option pool increase. So generally what happens is that the investors in the series A will say, "Okay, we're going to put some money in. We know that this money is going to go towards hiring. So we want you to create an option pool for all the new employees that you're going to employ and give equity to, in advance, so that it's sitting there ready for those employees." Usually you see that the option pool is about 10%; might go up to about 15%, but anything more than that is, is fairly nonstandard. Yes. Where did that come from? Oh over there, okay. Yes.
Audience: [inaudible] .
Kirsty Nathoo: The question is, is the 10% coming from founders or collectively, and you'll see in a moment is going to dilute the existing shareholders and the safe holders, but it doesn't dilute the new money.
Audience: How is the option pool represented of the cap table? Is it represented on the cap table or what form does it take?
Kirsty Nathoo: The question is how is the option pool represented on the cap table? So if we go back to here, we just show it so that we have the options available from the pool that haven't been issued is a line, and anything that has been issued from the pool is a separate line.
The reason why we show those two things separately is that these shares are considered outstanding, they're considered issued whereas these aren't, and so that's the difference between what ... That's what fully diluted means. It means outstanding shares, which are these two lines, plus any shares reserved under the option pool. All right. Where are we? Quick math question for, for you, what do we expect that the lead investor will own? What percentage of the company do we think the lead investor is going to own after the round closes?
Audience: 20?
Kirsty Nathoo: 20%, yeah, for the lead investor, 25% in total for all of the series A investors.
The lead investor is going to put in $4 million divided by $20 million, gives 20%. So you'll see in a minute, the cap table that that all works through in the calculations, but it's always good to just do that quick check, so that you can sense check what's going on in your cap table. All right, so in a priced round where you have a weather company has raised money just on post money safes and then has raised a priced round, three things will happen, and these three things happen at the same time in terms of the documents, but in terms of the calculations, it's important that the order is correct.
The three things with post money safes is that the first thing that happens is the safes convert into shares.
Then an options pool is increased or created if there isn't one already, and then the new investors invest. You'll see in a minute how that all works through with the calculations. Now, one other thing that starts to get a little bit confusing here is one of the sort of the lingo of how this works is this often the lawyers and the founders will talk about the safes being included in the pre money, and what that's basically saying is that when the new investors invest, and they calculate their price per share, the calculation includes the shares from the conversion of the safes. So even though the safes themselves are referred to as post money safes, that's talking about how the safes convert. This sentence where the safes are included in the pre money is talking about how the series A price is calculated. It gets a little bit confusing because it's talking about post money and pre money, but that's just something to bear in mind when this happens. Obviously, at the time that you're raising price round, you're going to have a lot of advisors. You're going to be working with lawyers who can explain all of this to you as well. All right, let's go through these three steps then.
The first step is our safes are going to convert, and we already know because we've already done the calculation that these safes are going to convert into 15% of the company. 15% of the company means 15% of the total, fully diluted shares; both common shares and preferred shares. Investors get preferred shares which have a different set of rights and privileges than the common shares, which is what the founders and employees get. We have enough information here in the cap table that we have here to calculate what the actual number of shares are here because we know that they're going to be 15% of the total issued shares. So we know that this is 85% of the total issued shares. So we know what our total is, and then once we get the totals, we can work out what 5% of that is and what 10% of that is. After a bit of algebra, these are the numbers that come through. Now at this point, we have 11,764,705 shares in total because it's preferred shares plus common shares. Our first safe investor who we said was going to have 5%, has 588,000 shares, which represents 5% of that 11.7 million. Our second safe investor has 10%. Now, it's important to remember that this is partway through a whole process. It's part way through those three steps that are happening in a priced round. Actually you never going to see your cap table looking like this. This is just one step in the calculation, but it's just a breakout so that you can see where that 15% has come from. You can also see here that when we were saying that the founders, instead of owning I'm 92.5%, they owned about 78%. You can see that here because they'd been diluted by that 15%, as have the employees with their options. This is the post money part of the post money safes, after the safes have converted, but before anything else has happened in relation to the priced round. Got it? Okay. All right, so the next step is ... Oh, we have a question. Okay.
Audience: The percentage of ... If you can go back.
The 5%, 10%, that has manged to be there [inaudible] ?
Kirsty Nathoo: The question is, does the 5% and 10% have any ...
Audience: Like the [inaudible] .
Kirsty Nathoo: The 5% and 10% is based on the valuation cap in the safe, and so assuming the priced round valuation is higher than the valuation cap in the safe, then this is just looked at with reference to the safe, and it's just connected to the existing shareholders. If in the very rare circumstances that the priced round is lower than the valuation cap on the safe, then actually, the safe investors will get a better deal because they will sell their share.
Their safes will convert at the same price that the series A investors have, which is a lower price than the valuation cap. So actually there is the potential that this can go up. This percentage can be higher if the priced round is valued at a lower price than the cap on the safe.
Audience: [inaudible] .
Kirsty Nathoo: It still triggers the conversion even if the valuation's lower because it's the fact that they've raised money that triggers the conversion, not the price, so it's just something to bear in mind that when we talking about this, the post money safes and in this example, that you're selling 15% of the company, there is potential that it could be higher, but it's a pretty rare situation where you raise a priced round that's priced lower than the valuation of your safes. It's also something to bear in mind of trying not to negotiate too hard on the safes to make your caps too high because if you raise money on $100 million cap, but then you can only raise money on a $25 million dollar priced round, let's say, then you're actually selling more of the company to those safe holders than you expected.
Audience: If the founders had convertible debt at this point in time [inaudible]
Kirsty Nathoo: Okay. So the question is if there's convertible debt, so this would happen here as well.
The calculation for convertible debt is slightly different, but it would happen in here and you would show them just as other investors because they would be converting into shares in relation to the priced round as well.
Audience: What if you went crazy and actually sold 85% of your company and the valuation is lower at the end. What happens? Can you share on that?
Kirsty Nathoo: Well, so that's the big question. So the question is what happens if you go crazy and sell 85% of your company? That's the problem.
The founders can raise too much money on too low valuation caps when they're raising on convertible instruments.
They don't realize how much dilution they're taking and then they get to that priced round and they look at the cap table and they're just like, "What? I only own 10% of the company now," and unfortunately there's not a huge amount you can do at that point because you've already entered into the contracts with the investors to do this. That's why it's important to not get into that situation in the first place.
Audience: [inaudible]
Kirsty Nathoo: The question is how the cap works in relation to the priced rounds. If the priced round is higher than the cap, then the safe converts at the cap, which means that the safe holders basically get more shares for the same amount of money than the series A investors get. In that situation, that's how, you know, what percentage you're selling. In the situation where the cap is higher than the priced round, it wouldn't be fair to the safe holders to have them getting a worse deal than the series A investors, because they put money in earlier. What happens then is that the calculation, if you remember good, if you go back to the section one of the safe, where it says what's happens in a priced equity round situation, it says, if the cap is higher than the priced round, then they just used the priced round price to calculate their shares, and so because that priced round price is different, these numbers will go up.
Audience: But you don't lose much, right? The founders don't lose much?
Kirsty Nathoo: Well it depends. It depends on the delta. If it's only a little bit different, then yeah, maybe instead of 15%, they've sold 16% let's say. If the delta is really big, then it could go up, but again, it's something to be aware of. It's in the current environment, it's pretty unlikely that people raise priced rounds at lower valuations than their safes, just because when you're raising money on safes, the investors won't agree to invest at a ridiculously high valuation because they want to get that bonus of the lower price when their safes convert. Let's keep going. All right, so this step you're going to have to trust me on.
The next step in the section is that the option pool is increased and this is actually quite a complicated calculation. It gets a little bit circular and I'm going to be sharing a model with everybody so that you can see how this works if you're interested, but basically what you're trying to do is to get to 10% of the post money shares, are sitting available in the option pool. In this example, we're going to increase our option pool by 1.695 million, and you'll see in a minute that that flows through into the cap table and you'll see that 10%. But just trust me on this one because this is quite a complicated calculation.
Then step three, the new money invests. This is where we have our series A investors putting in $5 million, and there's a couple of calculations that happen in there.
The price per share, that's calculated for the round is the valuation divided by the capital capitalization. So this is the pre money valuation, $15 million. When we talking about capitalization here, what we're meaning is this is the total fully diluted shares after the safe conversion and the option pool increase. So that's why this is step three because our safes have converted and our option pool is increased. We have our 10 million shares that we'd issued, 9.25 to the founders, 725,000 in the options pool, plus the safe conversion shares, plus the increase in the options pool and you'll see the numbers in a moment. So then the number of shares that the series A investors get is the amount they're investing divided by their price per share. So those are the three calculations that you need to remember for your series A. Here we go. Here are all those calculations. We're saying that the capitalization, we have our 10 million shares that were already issued. We have our 1.76 million shares from the conversion of the safes, and we have our increased to the option pool of 1.695 million. So that gives us 13.5 million total shares. We divide off $15 million, buy those shares to get a new money price. So this is the price that the investors will pay for their shares of $1.114. So that means that the $5 million of new money that's coming in, will buy 4.48 million shares and the lead investor, because they're putting in 4 million, will get 3.59 million of those shares.
These are the calculations that get worked through. This is what the cap table, then looks like post money. So this is now everything's been done in the round. So we've still got our founders, we've still go sour options. Those numbers haven't changed. This number's changed because it's increased by 1.695 million. You can see here that now this is 10% of the total shares, which is what we were targeting because that was agreed in the time sheet. We have our safe investors who the number of shares haven't changed because we'd already done that calculation for the conversion, but their percentages have changed. It's gone down a little bit, and the reason why those have gone down is because the safe investors have been diluted by the series A money and by the increase in the options pool.
Then we have a lead investor in our other investors, in our series A. As you remember when we did the quick back of envelope calculation of the point of guessing the term sheet, our lead investor owns 20%, our other investors own 5%. So in total they have 25%.
The founders up here now own 51.5%, which is a big jump from the cap table that they originally were looking at, where they owned a 92.5%, and that's where this gets complicated. If you don't understand your dilution, you don't understand how much of the company that you've sold. When you get to this point and you look at the cap table and you're saying, "Oh no, I only own 30% of the company, how did that happen?" There isn't a lot you can do because most of that dilution has already happened because you've raised money on safes and so that's why it's super important that you keep track of this dilution because at this point, there isn't a lot you can do about it. All right. Moving on, so a couple of top tips for you. We've mentioned briefly about convertible notes and that's just another instrument that you can use to raise money in the early days. Often we find companies outside of the US will raise money on convertible debt.
There's nothing wrong with it. It is a little bit more complex just because you have to deal with interest that accrues on it and maturity dates, but companies deal with that. What I would say is try not to have a combination of safes and convertible notes, just because it makes things a little bit more complicated in the calculations. So if you start raising on debt, then probably stick with it, but ideally, start with safe because it's actually making your lives a little bit easier. Again, we're now recommending that companies use post money safes, but there are pre money safes available and some of you may have already raised on pre money safes. That's totally fine. It just makes it a little bit more complicated to understand dilution, but you can still do the same back of envelope calculation to get a ballpark figure, even though it's not exactly accurate. If you have raised money on pre money safes, then it's fine to come to in future raise money on post money safes.
The calculations just gets a little bit complex, but it's totally doable. So that's fine, don't panic. Would suggest that you probably move on to post money safes even if you've raised money on pre money safes, just so that you can keep track of your future dilution. A quick word on optimization in all of this, when you're raising money on safes, don't try to over optimize for the cap. It gets really easy to start seeing this as a competition, and you start talking to your friends and you start saying, "Well, I've raised money on a $6 million cap," and they say, "Well, I've got an $8 million cap and so I'm more successful than you are." As Jeff mentioned last week, fundraising is not the be all and end all. It's a means to an end. Don't try to over optimize. Don't try to push this up too far because you're negotiating with investors who do this all day and every day and you're probably not somebody who negotiates this all day and every day. Actually, when I run the numbers on the calculation that we've just been through, if we'd have changed that 800,000 that was raised on an $8 million cap to a $10 million cap, the ownership at the close, for the founders, would have been 52.7% rather than 51.5. It's not actually a huge difference, especially if you have two or three or four founders, co-founders and the extra pain for negotiating that $2 million cap is probably not worth it. Just take the money, do what you need to do with the money and made the company a success instead. In conclusion, use post money safes where you can, hopefully all of you can use those going forward. Understand what you're selling with the company, so make sure that you keep track of your dilution, and understand where the company is being sold. Finally, again, don't over optimize for valuation caps because it doesn't actually make as much difference as you think it's going to make. So we have a couple of minutes for some more questions.
Audience: [inaudible] .
Kirsty Nathoo: Sorry, repeat is the question, do you care about [inaudible] ?
Audience: [inaudible]
Kirsty Nathoo: The question is don't you care more about voting power and that's definitely something that gets negotiated as part of the series A term sheet. Where the voting power tends to come from in here is the composition of the board and so generally, you want to keep the founders having majority of the board and so often at series A, what you'll find is that this ... If there's two founders in the company, you'll have two founders on the board and you'll have a representative of the lead investor on the board.
The founders still have the majority and that's really where the voting power comes from.
Audience: How important is to find the lead investor and how should one approach [inaudible] ?
Kirsty Nathoo: The question is how important is a lead investor? When you're raising money on safes, you don't necessarily need a lead investor.
The beauty of the safes is that as soon as somebody agrees to invest in your company, you can say, "Great, here's the safe, sign it, and give me my money." Even if that's only a small amount of money, that doesn't matter as long as you've negotiated how much they're putting in, and what the valuation cap is. So for safes, it doesn't matter at all that you don't have a lead investor. At the priced round stage, it is important that you have a lead investor because there's so much to negotiate that you don't want to be negotiating with a bunch of people. You want to negotiate with one pers ... Oh, well one investor who is, is setting out the terms because they're putting in, in this example, $4 million after the five, and then everyone else gets pulled along with those same terms.
Audience: What is the maximum amount that you should give up [inaudible]
Kirsty Nathoo: Great question.
The question was, what's the maximum amount that you should give up for in a seed round or a safe round? If we just quickly go back to this. This is actually a fairly standard cap table that we'd expect to see, where the founders own just over 50%. We see that in the vast majority of cases coming out of a series A priced round. If you think about it, these numbers are set. Generally, in pretty much any series A around, the lead investor is going to want around 20%, and the total amount sold of the company is going to be around 25%.
The option pool is going to be around 10% post money, so that's already 35%. So then really all you have to play with is what the safe investors get to drive what the founder's own. So the more you sell to the safe investors, the less the founders are going to own. In this example where we were selling 15% of the company, that's probably about the range that you want to be looking at. Obviously every company has a different circumstance, and getting some money in less good terms is better than getting no money in it at all.
There's always discretion that has to be made, but yeah, this is a fairly standard cap table about 15% on safes, about 25 to the lead ... To the series A investors, and about 10% options pool with the rest of the founders. One more question and then we've probably got to wrap up. So let's go the back over there.
Audience: [inaudible] .
Kirsty Nathoo: Okay. So it's two things there. First thing is what happens if the founders are putting in money themselves? The second thing is should they put in safes; not safe notes because that makes me grouchy, because safes aren't debt, so you don't call them notes. That's one of the things to bear in mind.
They're just safes.
The other question was around the founders; there's different ways you can do that. If founders are putting in money, they can just loan the company money, and so then, if they're putting in $25,000 and then they raise a million dollars from the safe investors, they could repay the founders or there are situations where the founders would put that money in on a safe and so they potentially get some or they would in that situation, get some series A preferred shares when the safes converts. So you can do either way. All right. I think we finished on time, so that's good news. Thank you very much for listening. I know this stuff's difficult.