Earlier today, Fred Wilson published “Raising a SAFE or Convertible Note in Between Rounds” on AVC, in which he suggests:
Taking a SAFE or convertible note between rounds can make it hard to create enough of an allocation in the next round to attract a high quality lead who will price the round.
In particular, Wilson explains that SAFE holders’ commitments to the subsequent round, coupled with existing investors’ pro rata rights, effectively crowd out future investors by limiting their desired allocation and thus pro forma ownership levels. Unintended consequences. Fair point and worth reading in full.
Because math in prose is hard, and in an effort to present this information in context, Flux created a model that illustrates Wilson’s math. For simplicity, the model assumes the use of a SAFE instrument (rather than convertible note) of $2 million in nominal value with a 0% discount to the Series B price. You can find it here (pro tip: enable iterative calculation).
If there are any questions/comments/thoughts, please reach out.