Investing in a startup is more than just the exchange of capital for equity. It’s about aligning with founders who are working tirelessly to bring their vision to life. As an investor, your role extends beyond merely providing funding. You become an integral part of the journey, offering strategic advice, industry connections, and support during challenging times. The choice of investing instrument plays a crucial role in this relationship, with options including priced equity, convertible notes, and Simple Agreement for Future Equity (SAFE).
Priced equity is the most traditional form of investing. Here, you invest a certain amount of money in exchange for a percentage of the company’s shares. The value-add for founders in this scenario is transparency and certainty. They know exactly how much equity they’re giving away, and there are no surprises down the road.
However, priced equity rounds require valuation of the company, which can be time consuming and contentious. They also involve significant legal fees, which might not be affordable for early-stage startups. This brings us to convertible notes and SAFE, two instruments designed to overcome these hurdles.
Convertible notes are loans that convert into equity when the company raises a future priced round. The value-add here is the deferment of valuation until the company has more traction, making it easier to agree on a price. Convertible notes also have a ‘discount rate’, giving early investors more equity for their investment as a reward for their early support.
SAFE, on the other hand, is a simpler, more founder-friendly instrument. Like convertible notes, SAFE defers valuation to a future date, but it’s not a loan and it doesn’t accrue interest. This means fewer complications for founders, allowing them to focus on growing their business.
As an investor, your decision between these instruments will depend on the specifics of the deal and the stage of the company. But regardless of the instrument you choose, remember that your value-add goes beyond the capital you provide. Your experience, connections, and support can make a significant difference in the founder’s journey.
In conclusion, priced equity, convertible notes, and SAFE are powerful investing instruments that can add value to a founder’s journey. By understanding the advantages of each, you can make informed decisions that align with your investment strategy and contribute to the success of the startups you invest in.
