Carolynn Levy and Kirsty Nathoo - Startup Investor School Day 1 | Summary and Q&A

TL;DR

Learn about the mechanics of startup investments through Safe (Simple Agreement for Future Equity) contracts, including how they convert into shares and provide potential returns for investors.

Key Insights

• This session covers the fundamentals of startup investment, with experts discussing the process and what it entails.
• The presenters, Carolyn Levy and Kirsty Nathoo, have extensive experience in dealing with startups, having worked with thousands of companies.
• Investors who can offer help should do so, while asking for additional shares is seen as asking for a freebie.
• Having money is valuable, but having someone who helps with strategy and direction is priceless, so investors should choose wisely.
• The Safe, an acronym for Simple Agreement for Future Equity, is a popular method for investing in startups, particularly at the early-stage.
• The Safe converts into company shares at a later point, offering a clear and simple agreement for investors.
• Different types of Safe include the capped Safe, discount Safe, uncapped Safe, and MFN Safe, each with its own unique features.
• The process for investing using a Safe involves a handshake protocol, using online platforms like Clerky, and signing additional documents when the Safe converts into equity shares.

Transcript

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Questions & Answers

Q: How does the Safe contract convert into shares of a company's stock?

The Safe contract converts into shares when the company completes an equity financing round, typically a priced round. The number of shares and the conversion price are determined based on the terms negotiated in the round.

Q: What are some factors to consider when investing through Safe contracts?

When investing through Safe contracts, it is important to consider the valuation cap, the ownership percentage, and the potential for dilution. Investors should also be aware of their rights, such as pro-rata rights in future financing rounds.

Q: Can Safe contracts be used in countries outside of the United States?

Safe contracts can be used in many countries, but investors should do their research to ensure the contracts are valid and recognized by local laws. Some countries may have specific regulations or requirements for startup investments.

Q: How can investors ensure they are fully rewarded for their investment in a startup?

To maximize potential returns, investors should carefully consider their investment choices, evaluate the valuation cap, and negotiate fair terms with the founders. Pro-rata rights can also provide opportunities to maintain ownership and participate in future funding rounds.

Q: What happens if a company fails or gets acquired after an investment through a Safe contract?

In the event of a company failure, Safe investors are typically prioritized and may receive a partial repayment if there are funds available. In an acquisition, Safe investors usually convert their investment into common stock and participate in the proceeds along with other common stockholders.

Q: Should investors consider investing as individuals or through a legal entity?

It depends on the investor's specific circumstances and tax considerations. Investing as an individual can be simpler, but if pooling money or using other people's funds, setting up a legal entity like an LLC or fund structure may be necessary.

Q: How can investors protect their rights if subsequent investors try to disregard the terms of the Safe contract?

If subsequent investors are not respecting the terms and rights outlined in the Safe contract, investors should communicate their concerns, push back on any breaches of contract, and seek to have their rights honored. Transparency and open communication are crucial in resolving disputes.

Summary & Key Takeaways

• Safe contracts were created to simplify and streamline startup investments, allowing for quick and efficient fundraising.

• The contracts convert into shares of a company's stock at a later date, providing potential returns for investors.

• Understanding the mechanics of the Safe contracts, such as valuation caps and conversion events, is crucial for investors to make informed decisions.