Modern Startup Financing

MODERN STARTUP FINANCING

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The Basics: • Form a corporation • Need money to grow? • Sell part of the company 
 (sell equity) to raise money

Term: Means: • Priced Equity Financing Fundraising by • Preferred Stock Round selling stock at a • Preferred Stock specific price per Financing share • Series A Financing • Series Seed Financing • Priced Round

Term: Means: Convertible Round Fundraising by • • Note Round selling convertible • Safe Financing securities • Safe Round • Early Stage Round • Early Stage Financing

What Has Changed? • Structure • Access • Focus

What Hasn’t Changed? • Preferred Stock Financings • Valuation & Dilution • Communication

Old Way of Raising Early Money: Series A Preferred Stock financing (a priced round) • Valuation / outstanding shares = price per share • Sell to Investors - angel groups • Negotiate terms of preferred stock • Lots of documents (closing volumes!)

What was broken? Time & Cost Inflexibility: the cost of starting 
 a company decreased

The Transition Bridge loan financings • Investors loan $ on convertible promissory notes • Real debt terms - interest, maturity

Realization: Convertible promissory notes are a better way to fund early stage startups

Convertible promissory notes replace priced rounds as the first fundraising event • Faster • Cheaper • Flexible …but still technically debt

Modernization of the Convertible Simple Agreement (for) Future Equity

Why does the safe need to exist? Because it doesn’t make sense to use debt to sell equity Investors don’t want to be lenders, startups don’t want to be borrowers

Details about the safe: • See “resources” tab at www.ycombinator.com • Watch other SUS video lectures • Read the safe and the safe user

https://ycombinator.com/resources/#documents

When do priced rounds happen? • After the early stage financing • Safes convert in the preferred stock financing

Is modern early stage financing perfected? Not quite. • Tracking dilution requires more vigilance • Administrative challenges - lots of stockholders • Investors aren’t very invested

Takeaways • Modern early stage rounds of financing are done using convertible securities, like the safe • Selling preferred stock in priced rounds of financing is still modern, but not for first fundraising • Point of fast, flexible, cheap fundraising resources = founders focus on building • What is standard in Silicon Valley is still novel in other places

Thanks! Carolynn Levy Partner / GC, Y Combinator