I invested in a friends company early, hence the SAFE note.

He has new money coming in. They sent out an amendment asking to remove the valuation cap of 4 million and give us a 20% discount to the new money raised (seven figure number).

I have never heard of such a thing. The company is claiming the new money is requiring that to invest.

I appreciate the collective wisdom here. Have any of you had a similar situation? What would you do?

I'm interested in this too…

I would have to think you would have first right of refusal to buy more shares at same value they are raising at

Bernie, is that you?

Yea it's definitely a thing. Valuation caps effectively dilute any future investment that goes above them, so if one is far below the proposed valuation, it can scare away new investors. What's the pre-money that your investment company is proposing?

Are they possibly just exercising a MFN clause?

I am trying to gather the new pre money. They have provided very little info. Will update as I get it

Y combinator actual us some decent info on SAFEs, look for the user guide near the bottom of page, talks about caps. has some good examples.

https://www.ycombinator.com/documents

Engine10 said:

---

Y combinator actual us some decent info on SAFEs, look for the user guide near the bottom of page, talks about caps. has some good examples.

https://www.ycombinator.com/documents

---

thank you

nactownag said:

---

I would have to think you would have first right of refusal to buy more shares at same value they are raising at

---

This isn't that. In the agreement, the OP would have the right to covert his initial investment into shares at a valuation of no more than $4MM. Now they are asking him to convert at an amount greater than $4MM but at a discount to the current round which will leave him economically worse off. The bigger question is "how much runway does the company have"? If the company is in a position that has to raise, the OP is in a bad spot. He can take the diluted valuation and live to play another day, or hold out at the expense of the funding and hope that the company is able to stay in business.

Spot on. The good news, though, is that 1) the new investors wouldn't care if the proposed pre-money was only slightly higher than the cap, and 2) you don't set a cap far below the ballpark valuation at the time of investment (a SAFE is explicitly designed to avoid the valuation question but you still have an approximate idea). So, we can deduce that the company has likely experienced great growth since OP made his/her investment since the cap is far enough below the pre-money to spook the new investors.

OP, talk to your friend to see what other funding options they have, but if this is it, you're likely gonna get crammed (better to own less of a solvent company than more of an insolvent one). You'll probably still make great money, but not quite as good as before.

For the edification of people on this board, SAFEs are not an investor-friendly instrument.

More details:

I actually had good terms early. convertible note w/ a SAFE. 6% simple interest then a 4 mill valuation cap.

Subsequent SAFE only investors have a 15% discount and cap at 9mill

The pre money now is 9 million.

I put 50k in. Essentially I would have no increased value if I took this deal assuming a post of 10m

Are there a bunch of other people who invested at the same time that you did who have the same terms, specifically that 4M cap? Really weird of the.new investors to get bent out of shape over a measly $50k otherwise. Quick napkin math says that if it's just you, then letting you convert under your old terms versus their proposed new terms would dilute them from 9.94% ownership to 9.89% ie it would have almost no impact at all (the exact numbers will be different because of the safes with a 9M cap, but the dilution between the two options should be about the same).

Based on these numbers this seems like an odd thing for the new investors to get worked up over. I'm not sure how much you want to push, but you could probably ask to rework some of your non-headline value terms. At minimum you'd want to be pari passu with the new money, and it couldn't hurt to ask more than one turn in liquidation preference and possibly make your preference participating (assuming you're currently non-participating now). Those are both big asks, but asking you to take a >50% haircut on your SAFE is also a big ask.

definitely some others on my terms but likely not much.. it was pretty much friends and family. I would wager 500k ish

There was a clause that allowed majority change. I did not sign off but got crammed down anyway

For something that's called a simple agreement, this sounds awfully complicated.

Well at least you got the 20% discount and it sounds like the company is making some progress. Not a loss yet, though it does suck to get run over like that.