Mar 6, 2018 · 59m · y-combinator
Carolynn Levy and Kirsty Nathoo - Startup Investor School Day 1 · Y Combinator
0:00 / 0:00
▶ Watch on YouTube →
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In Day 1 of Y Combinator's Startup Investor School, Carolynn Levy and Kirsty Nathoo explain the fundamental mechanics, math, legal nuances, and operational best practices of investing in early-stage startups using SAFEs (Simple Agreements for Future Equity).
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The partners as informed peer 0.0 Guest teaching 0.0 Guest disagreement 0.0 The partners pushing back 0.0
speaking balance: gold is the partners, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 5:05 Crabby about 'SAFE note' terminology
Carolyn emphatically rejects calling a SAFE a 'note', correcting a common misconception by clarifying that it is neither a loan nor debt.
Hardest push from the partners ▶ 41:40 Defending SAFE over convertible debtJeff Ralston interjects to argue why SAFEs are preferable to convertible debt, explaining how debt maturity dates often needlessly kill viable startups.
Biggest teaching moment ▶ 10:20 Explaining valuation cap misconceptionKirsty educates the audience that a valuation cap is not a current company valuation, but merely a mechanism rewarding early risk-taking.
The partners hold their own ▶ 55:10 Jeff Ralston on AngelCalc and pre-money standardsJeff demonstrates his deep practitioner expertise by detailing why he built AngelCalc to model multi-safe dilution and pre-money conversion quirks.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The partners as informed peer | Guest teaching | Guest disagreement | The partners pushing back | Why |
|---|---|---|---|---|---|---|
| Understanding the SAFE: Fundamentals, Terms, and Flavors | 0 | 0 | 0 | 0 | Carolyn Levy delivers an instructional monologue introducing the SAFE, explaining that it is a 5-page convertible security rather than debt, and breaking down standard caps, discounts, and MFN provisions with no host interaction. | |
| SAFE Conversion Mechanics, Math, and Ownership Calculations | 0 | 0 | 0 | 0 | Kirsty Nathoo presents a detailed walkthrough of SAFE conversion mechanics, option pools, pre-money dilution, and cap table math in a structured presentation format without host debate. | |
| Non-Financing Scenarios: Acquisitions, Dissolution, and Lifestyle Companies | 0 | 0 | 0 | 0 | Carolyn Levy lectures on edge-case scenarios including high-value acquisitions, acquihires, corporate dissolution, and the incompatibility of SAFEs with lifestyle businesses in a solo presentation format. | |
| The Investment Process: Handshake Protocol, Platforms, Signing, Wiring, and Conversion Doc | 0 | 0 | 0 | 0 | Kirsty Nathoo outlines procedural steps for angel investing, explaining the Handshake Protocol, electronic signing platforms like Clerky, wire speed, and verifying pro forma cap tables. | |
| Core Advice for Angel Investors and Conclusion | 0 | 0 | 0 | 0 | Carolyn Levy and Kirsty Nathoo summarize core tenets of angel investing—embracing power law returns, remaining helpful without meddling on boards, and tolerating early pivots—to close out their lecture. |
Statements from this episode (18)
Ralston: Carolynn Levy invented the SAFE after Wilson Sonsini
“Carolyn is the Is the person who actually invented the safe. She used to be attorney at Wilson Sonsini before coming here, and Kirstie is the CFO of YC.”
Levy: Use convertible notes over SAFEs if prior investors used notes
“A time when you may not want to use the safe is if you are looking at a company that has already issued convertible promissory notes to earlier investors, and if that's the case, you're going to want to go ahead and just use that same note, not use the safe, a…”
Levy: SAFEs are not debt, accrue no interest, and lack maturity dates
“One of the most important things, I say this a lot, the safe is not a loan. It is not debt. It does not accrue interest. There is no right to be repaid at some point in the future at some maturity date. So please don't call it a safe note.”
Levy: Typical startup SAFE discount rates range between 10% and 20%
“Typical discount rate ranges in between 10 and 20%, so for example, ah, if the series A round that your SAFE is converting in is the lead investor has priced it at a dollar per share, and you've negotiated a 20% discount, your effective price is 80 cents a sha…”
Nathoo: A SAFE Valuation Cap Is Not the Startup's Current Valuation
“They think it's a current valuation of the company. That's really not what it is. All it is, is a way for you to be rewarded for coming in at the earlier stage, ah, when in theory you're investing at a riskier stage.”
Nathoo: Closing Option Pools in Priced Rounds Are Usually Around 10%
“And usually the closing option pool, which is negotiated as part of the term sheets negotiations, it usually is around 10% of the post round shares.”
Nathoo: Priced Round Term Sheets Usually Specify SAFEs Convert Pre-Money
“Next thing is that the safes convert into shares, and although the safes themselves don't, ah, state this, the term sheet will usually specify that the safes convert in the pre-money.”
Nathoo: SAFE Investors Cannot Know Final Equity Ownership at Signing
“At the time that you actually sign your safe, you don't really know how much ownership you're going to wind up with after the priced round, and the reason for that is that even though the safe says how the safe's going to convert, it doesn't specify how many s…”
Levy: Startup dissolutions rarely leave enough money to repay investors
“In a dissolution situation, not only is there never any money for stockholders, but there's rarely enough to pay back investors either.”
Levy: Investors should not use SAFEs for lifestyle businesses
“If you want to fund lifestyle companies, You definitely do not want to use the safe, because then you're going to have this problem all the time.”
Nathoo: Lawyers frequently make errors on SAFE conversion cap tables
“The cap tables that we see, and we've now seen thousands of cap tables, it's surprising how many times the lawyers actually get the conversions wrong.”
Levy: Angel Investors Waste Time Negotiating Downside Protection
“If you believe in the power law and you invest that way, excuse me, then what you're not going to do is waste time negotiating downside protection, because what you've realized is that eking out a one and a half X return
On all these little investments is not …”
Levy: Startup Founders Usually Do Not Want Angels on Their Board
“Sometimes angels think that they need to ask to be on the board of directors in order to be officially helpful, and you don't, and please don't, because it's actually not something the founders probably want. Sometimes, I mean, there's exceptions, but usually …”
Levy: Founders breach contracts if they ignore SAFE pro rata rights
“This is a contractual right. You're breaching the contract if you do not give the safe holders their pro rata right.”
Levy: Startups no longer need PPMs for SAFEs or priced rounds
“You don't even need a PPM these days to do a priced round. Nobody, nobody really does those anymore. SAFE is just one document. That's all you need. For a priced round, it's usually just a term sheet.”
Nathoo: Series A leads push pre-money SAFE conversion targeting 20% ownership
“Series A lead investors are getting more clever about this and realizing that if the safes convert in the pre-money, then the, Lead investors getting less dilution. And really all that's happening is if the safes do convert in the round, they'll just massage t…”
Ralston: SAFEs beat debt because debt allows investors to kill viable startups
“About lifestyle companies and why I think the safe is preferred in general to debt is because we've seen too many times where the fact that there's debt there is used to kill a company that didn't have to die. And it's too easy for investors to call that debt …”