Ask HN: Paper capital contributions as YC SAFE that converts to common stock?
I am slowly ramping up on the options my co-founder and I have to make capital contributions to our bootstrapped C Corp. When we incorporated we each purchased 40% of the available common stock and set aside 10% for early staff leaving 10% available. My proposed strategy is to track all founder capital contributions as SAFEs that will convert to equity issued from the remaining 10% common stock in Series A. All other stock (ESOP or VC) will be sold as preferred stock. Is this a sound strategy? If not, how would you adjust it for a founder team that would prefer not to track capital contributions as debt?
13 comments
[ 5.1 ms ] story [ 36.0 ms ] threadAlternatively, refile your articles and stock purchase agreement and tie that capital to the stock purchase or initial contribution. I would still recommend founder loans instead. If you use a SAFE or other convertible debt on amazing terms, future investors may ask for the same terms.
Edit: I financed my startup (https://rumble.run) that way and paid myself back a month ago. Painless all around.
Regarding contingency plans, you don't need to have a hard repayment date in the loan terms and can let it accrue interest indefinitely (until bankruptcy, acquisition, or otherwise). Unlike traditional convertible debt a founder loan normally doesn't "blow up" into a huge equity stake if not paid back.
If things don't work out and you have the opportunity to roll the founding team into an another company (acquihire), loans are an easy thing to assign value to, even if the IP or goodwill is more difficult. Negotiate the loan repayment as a signing bonus if you can.
If things work out and you either raise money or bootstrap to profitability, you can pay off the loans as it makes sense, or just forgive them outright if that's easier. Either way you probably don't need to involve your whole board to manage it, unlike equity changes.
I get the desire as a founder to obtain the same terms on capital as future investors, but it can put you in a weird place and can complicate future fundraising. Props to anyone who can make it work, but I had good luck with the founder loan process and felt like it was the cheapest way to finish bootstrapping (we did).
Good luck either way!
The second part of your plan is unclear to me. When you issue employees options, those will generally be options to buy common stock, not preferred. And if and when you raise a priced VC round for preferred shares, all of your SAFEs will then convert to preferred shares.
Thanks for clarifying that ESOP is common stock. In the SAFE guide its unclear where this belongs. I admit I still owe the concept of options more time to digest.
The additional preferred shares you would get when this SAFE is converted will almost certainly be very very small compared to your original founder stake - to the point where it's kind of pointless to get it in the first place. Your investors wouldn't want your initial founder equity to be preferred, but they should have no problem with you putting in your own additional money alongside theirs on the same terms. Many investors like to see their founders have skin in the game.
From the founder's perspective, you're better off making a loan to the company, since you're already so rich with equity. That said, in my experience, investors don't like putting money in just to have the founders take money off the table, especially early on. With my first company, we started off with founder loans, and when we raised our first institutional round, our investors insisted we convert those loans into equity at their same price as opposed to paying ourselves back.
That's why my approach with this second company was to go straight with the SAFE off the bat for my capital infusion.
It is possible that our first company was an anomaly - and that founders putting in additional capital via loans is the standard practice and that most investors are totally cool with you getting paid back on those loans.