TikTok video #7586726948181691662

The way that startup safe notes convert is one of the most misunderstood things in startups. Hi, I'm Matt, I'm a VC, I also code. I was the first investor in Hugging Face, investor in Modal, Anchor, which was acquired by Spotify, Factory, AI, Patronus, a bunch of startups that were started by people who code. So why are safes so misunderstood? They're the cheapest way to finance a startup, meaning it could cost you hundreds of thousand dollars to do an equity round. But if somebody invests, let's say a million dollars on a $20 million valuation, you and that investor both know that they own 5% of the company. If it turns out the company's worth less later, it's only worth 15, they get the downside. If it turns out the company's worth $100 million, they get the upside. Not so with a valuation cap on a safe. If your next round is actually on 15 and it's an equity round, then the safe converts at 15, meaning that investor who put in one on 20 actually gets the benefit of one on 15, or 6.6% instead of 5%. So why do people do it? Mainly because it's very, very cheap when you want to raise a low amount of money.