In this conversation, Daniel and Dan discuss the current state of the early-stage financing ecosystem, focusing on SAFEs (Simple Agreements for Future Equity) and convertible notes. They explore the evolution of SAFEs and how they have become the dominant form of early-stage fundraising. They also discuss the differences between SAFEs and convertible notes, the challenges of setting caps and discounts, and the potential problems with stacking multiple SAFEs. The conversation highlights the need for standardization and consensus in the industry. In this conversation, Daniel and Dan discuss the biases and complexities surrounding convertible notes and the need for a more thoughtful approach. They explore the different usages of convertibles, including bridging the gap between funding rounds, and the challenges of setting caps and discounts. They propose a first principles approach to determine the discount, tying it to the required ROI for venture capital. They also discuss the determination of the cap based on the optimistic valuation of the company. Overall, they advocate for a shift towards simpler and more transparent instruments that align with the needs of both founders and investors.

• SAFEs have become the dominant form of early-stage fundraising, with most seed rounds and pre-seed rounds using SAFEs.
• The use of SAFEs has evolved over time, with companies now raising multiple SAFEs at different caps.
• There is a lack of consensus on how to set caps and discounts for SAFEs, leading to confusion and potential issues.
• The terms of SAFEs can be complex and may not align with the original intention of simplifying early-stage fundraising.
• There is a need for standardization and clear guidelines in the industry to ensure fairness and transparency. There is a bias towards actual news and data in the startup ecosystem, which can lead to misconceptions and surprises when it comes to average conversion times and expectations for convertible notes.
• Convertible notes can be used to bridge the gap between funding rounds, providing a short-term solution for startups in need of additional capital before a Series A round.
• Setting caps and discounts for convertibles can be challenging, especially in cases of high uncertainty or deep tech startups. A first principles approach, tying the discount to the required ROI for venture capital, can provide a more transparent and fair solution.
• Determining the cap for a convertible can be based on the optimistic valuation of the company, rooted in the reality of the business but accounting for future growth.
• Simpler and more transparent instruments, such as convertibles with discounts and caps based on first principles, can benefit both founders and investors by aligning incentives and reducing negotiation complexity.

The referenced interview with Kate Shillo Beardsley of Hannah Grey VC: https://www.youtube.com/watch?v=AmTXBbC0glc