I got asked a similar question by two different founders, so I’m going to write up the answer here to refer to and get feedback from others.
How do I set terms / valuation?
This is always hard and one of the things I’ve noticed is that
Don’t put your valuation or the type of raise in your investment deck. Do put down how much you’re planning to raise.
One guideline is to aim for no more than 20% dilution per round. These days, at earlier stages of a company, 20% is quite high dilution, so you might aim for 10%.
So, if you’re raising $1M, a post money SAFE of $5M with a 20% discount might be a starting point.
You could raise half that — $500K — and only dilute by 10%.
SAFEs are flexible and simple in how you start and stop raising. You can take in money whenever people are ready to commit, although I would “circle” at least $100K before doing the paperwork in a batch.
Depending on your industry, your momentum, and other factors, you could certainly aim for a higher cap.
How much should you raise is a whole other topic. It should be guided by what you need to get to your next milestone, which should be 18-24 months away.
Some nuance is: the amount you ask for determines what type of investor might participate. It’s signalling. So, if you’re raising only $500K, someone who writes $500K cheques will ignore you, and you’ll get at most one $250K cheque.
Aim to raise $1M and you can take both a $500K cheque and a $250K cheque (or some combination).
Here’s an example of thinking about your next round.
When you raise a priced round — say $2M on $8M pre — that money converts as if you had done $1M on $5M. If you raise at a much lower valuation — say $3M pre priced round — This means the early investors still get a 20% discount.
What also matters is what size of cheque this person plans to write. If it’s only $10K or $25K — it should be on your terms.
And often, smaller investors aren’t we’ll set up to negotiate, so increasingly founders need to have a plan and run the process.
right now I’m raising on a post money SAFE for early investors. These are the terms I’ve come up with along with my advisors and the needs of my business, which protects us both as the company raises more capital. If you’d like to lead the round with a minimum $250K cheque size, I’d be happy to consider a priced round or otherwise negotiate custom terms.
This wording isn’t quite right — and you shouldn’t write it down, this is a conversation — but you should be clear on the terms you need for your business to succeed.
Even better, you might find someone who wants to both invest and actually work with you to think about valuation and other terms. Having a “lead” will do this — and that’s what you’re asking here, if the person leads deals.
How to explain SAFE to friends & family?
SAFEs are also a good format to use with non professional investors like friends & family & business associates. In Canada, these people have an exemption to be able to invest in your company without having to be an accredited investor.
It is becoming more common for small cheques — $10K, $5K or even $1K — to be done. I love to promote founders investing in other founders for example.
Most people in this category won’t understand SAFEs — or really any forms of investment.
So something like this explanation might be helpful:
I’m using a SAFE which lets me quickly and safely raise funds from friends and family and early investors. Rather than negotiating with friends and family, the SAFE makes it so that when a larger investor sets terms, all of the early investors benefit from the professional deal, as well as being protected by getting the same professional deal, with at minimum 20% discount for participating early.