What's driving Y Combinator to issue new, overhauled versions of its popular SAFE - now a broadly accepted instrument for startup seed financing - is of course an overriding concern for how convertible instruments impact startup founders, and in particular how those founders can measure or anticipate what kind of dilution they will face when those instruments are later converted in connection with a priced round.
But there are other issues being addressed in Y Combinator's new, September 2018 versions of SAFE, as well, points that don't have to do with implementing a post-money conversion calculation.
I want to draw attention to two points in particular, flaws, if you will, in the old SAFEs, that now appear to have been corrected:
- The old SAFEs, by default, purported to give each SAFE holder perpetual participation rights, from and after the round triggering conversion; and
- The old SAFEs did not permit amendment by a majority of the amount of the round then outstanding (as would be typical, say, in how most convertible note rounds are documented).
Both of these defects are addressed in the new SAFEs:
- The participation right, previously in place as a matter of default, is now eliminated, and that benefit is shuttled off to a side letter that can be bargained for or resisted on a case by case basis; and
- The amendment provision, though a bit wordy, gives the venture latitude to appropriately amend a round of SAFEs already in play, with due regard for investor signoff.
Also of note is a rep up near the top of the new SAFEs, that all parties agree they have not varied the SAFE being filled out from the official template as available on the Y Combinator site! Good luck with that. Standardizing seed financing documents has proven elusive ever since the dawn of Web 2.0. Although I do have to say that the SAFE has been much more successful at this than even the Series Seed documents were with initial, light preferred stock rounds.
There are many, many other mechanical changes in the new SAFEs, as well as substantive positions being staked out on accounting and tax treatment, and a liquidation preference of sorts for SAFE investors. If you want to dig into these, click here for a redline comparison of the valuation cap with discount SAFE, new version (recently posted) compared against the old (downloaded September 27, 2018).
Will be interesting to see how the ecosystem outside of accelerators adopts these new templates.
Image Credits: Collage by Amanda Hartzell, using images by Javier Cabezas, Steven Heycock, OliM, Juan Pablo Bravo, Dima Lagunoz, and iconoci, all under a Creative Commons license (CC BY 3.0 US).