by Lionesses of Africa Operations Department
We saw the other day a fabulous post on LinkedIn highlighting a recent Lioness Lean In event (here), by one of our extraordinary Lionesses. A total inspiration to us all, Sarah Collins of Wonderbag, has built a global company now on every investors’ wish list, yet the bottom of her post we saw the hashtag, #bootstrap.
It constantly breaks our heart to see the difficulty faced by Lionesses the world over to find funding. We have written enough on this (here is one example), as the total funding that finds its way to women led businesses is shockingly and continues to be stubbornly, sub 5%. Add a male name to your founder page and that funding rises into the 20% area - the rest of global funding goes to male or single male founders (and politicians the world over talk of equality - go figure!). If Sarah had to rely on bootstrapping her early years, it is no wonder mere mortals such as us have to.
Bootstrapping does often include a bit of friends and family (‘F&F’) money that then gets watered down once the company is successful and other investors start waking up. But what if there was a way to not only keep your F&F at their equity level (even if it is only at a small level), but also say a big thank you for supporting you when most needed, as later the new money comes in?
We have spoken in the past about a nice little trick for those doing a F&F round of equity raise or for a ‘pre-money’ round where the valuation of your pride and joy, your dream company is so complex that it is almost impossible to value, and this is called a SAFE or to give it its full name - a Simple Agreement for Future Equity, but we never went into it in any real depth - today we change that!
For those that don’t know, SAFEs were designed by a group called Ycombinator who bootstrapped themselves with a mere US$200k, yet they have since launched companies whose total valuation now tops $600 billion including Dropbox, Airbnb, Stripe, CoinBase, and DoorDash, oh you can add: Substack, Instacart, Scribd, OpenSea.
SAFEs work!
One of the many Lionesses we have been advising from afar is in discussions with a number of potential investors. As SAFEs are not just for F&F, but early stage ‘Angel’ investors too, we had already suggested and gone through in some detail the process of a SAFE. Later (much later) she was called up excitedly by an advisor who told her that she could do (wait for it) a SAFE. At which point she was able to explain to the advisor exactly what a SAFE was, allowing the advisor to return to their thoughts, now recognising that they were going to have to work a lot harder to earn their fee. For those non-Lionesses who subscribe to the Weekender and are therefore reading this, Melanie’s central mantra is that all we do for our incredible membership is free, so yes, this advisor will indeed have to work much harder indeed to earn their fee!
So let’s go into more detail about SAFEs.
A Simple Agreement for Future Equity is what it says on the tin. How simple? Well the toughest part of funding any new business is where to value your company. If you tell Uncle Jack that the US$10,000 he is kindly going to invest in your start up will give him 1% of your company, that values your company at US$1,000,000. If you turn to your Aunt Amelia who wants to invest US$10k but wants 5% of your company and you accept, this values your company at US$200k for her, but not for Uncle Jack who is now feeling a right mug. This is important because if at your first Series A round your company is valued at US$10mil, Jack only has 1% of that, he can only watch as Aunt Amelia waves sympathetically at him from her new Merc as she drives past. Trying to find a happy medium for an equal valuation between all your F&F, plus any early investors who turn up for the ride simply because they love your dream, becomes a nightmare. A SAFE takes this huge headache and parks it to one side by giving you and your early investors 3 simple choices.
The first is called a ‘Valuation Cap’ SAFE. Here you give Jack and Amelia a valuation on your company, say $1,000,000 - this becomes the cap that they will ever have in this SAFE for their investment valuation. So if you move to a Series A launch and your company is then valued at $10mil, Jack and Amelia get 10 times as many shares as the new investor for the same price. Cool eh?! Remember through your gritted teeth as Uncle Jack orders up that new Merc, that had it not been for his and Amelia’s money, you would never have got off the ground, so celebrate with them!
If you as a founder know that there is a chance that global domination in a very short space of time is a real possibility, with a ‘Unicorn’ valuation of US$1 billion when the first Series A Investors come knocking on your door, Jack and Amelia sitting on an original valuation of only US$1million, will scare you witless (hint: you will lose control of your company as Jack and Amelia’s valuation will be a killer - this is why your initial valuation can’t simply be a number plucked out of the sky - it matters!), then perhaps giving them a discount on the future Series A valuation would be smarter. A calm 10% or even 20% discount (what’s 20%? - a moment ago you thought you’d lost your company!), would be a decent reward for such early faith. This is called the ‘Discount Rate’ SAFE.
The third is where you just leave it unvalued and un-discounted and just say that if any other SAFE investor comes in and demands a discount or valuation, then Jack and Amelia can join in on exactly the same terms - this has a name that will please Uncle Jack and his dreams of a bright new Merc - it’s called ‘Most Favoured Nation’ (MFN for short). This is perfect for F&F type investors as you don’t have to spend hours negotiating with your relatives…never easy and avoids the risk that when you see them next for a family event, you will be seated on the kids’ table…
So there you have it.
SAFEs, they allow you to be fast. The number one rule in raising money is that when someone says they will invest (a soft commitment at that stage), you must work day and night to land it, take in the money and start using it to build your company. A SAFE allows you to slap a simple legal agreement in front of them, one signature later and bingo, the cash arrives. Serious legal deals such as Series A demand serious legal contracts, and that means time and money in lawyers, a lot of time and money. When a Venture Capital investor starts sniffing around, they will have a legal team that will do all of that hard slog, why bother now? A SAFE means you can spend all that time continuing to build your company.
SAFEs are not loans. Many countries have tight regulations over lending money - this avoids all of that. Remember that Jack and Amelia are getting either a discount or a decent ‘Merc' Valuation. Obviously no promises there - the valuation might come in at exactly the level you set - or even lower (don’t worry, Jack and Amelia join in at the new lower level - no Kids’ table!).
As far as Jack and Amelia are concerned, they still get to enjoy dinners with you, plus when the hard negotiating is being done - they will not be involved.
There is no expiry on SAFEs, so Jack and Amelia just have to wait - oh and because this is not a loan, they can’t come knocking on your door to ask for their SAFE to be repaid, it’s for all intense and purposes full equity, albeit ‘not quite yet’.
So that’s it. SAFEs, all in one short piece.
Everyone’s happy…
If you are seriously considering an early funding round, then please visit the gurus at YCombinator here, where in true Lioness spirit they have made their intellectual property completely free to all, which includes legal templates etc.
Now all you need to do is ensure that this SAFE delivers, because of course the risk is still on Jack and Amelia, you might go bust in the meantime, the SAFE will like any equity stake, be valueless and then the Kids will have to make some room at their table!
No pressure!
As always, Stay SAFE.