FAQ

Early-stage investing is extremely high risk; valuations must be commensurate with risks. Valuation strongly depends on whether or not you are generating revenue.  An idea without a good go-to-market strategy will typically have a lower justifiable valuation.

Pre-money valuation is the value that an interested investor should attribute to the interest (if a note is offered) or equity purchase that you are offering to determine if the offer is for a fair value.

Domain expertise in field or function; passion and energy; credibility; coachability, and the demonstrated ability to work well as a team.

Angel Investors consider several forms of funding to be most accepted. These include: (1) Preferred Equity, (2) Convertible Notes (essentially a short-term – 12 to 36 months in duration loan) that earn interest over the term of the note, and upon the occurrence of either the end of the note term or a pre-defined financing event convert to a specified form or equity, most typically preferred equity the purchase price of that equity is subject to a discount of 10% to as high as 30%, (3) Bridge Notes – a very short term (less than 18 months) form of a Convertible note, which in addition to earning interest and enabling the purchase of the to be issued equity at a pre-defined discount, is also protected by a pre-defined conversion limit or ceiling, which provides superior value protection to the investor at the time of the conversion event.  It is important to realize that notes of all forms should always exist uniquely and should never be issued back-to-back.

Most angel investors will NOT accept offerings that use a SAFE note as the method of investment funding. SAFE notes, or Simple Agreement for Future Equity is a financial instrument used in startup investing that allows investors to provide capital to a startup in exchange for a promise of future equity. A SAFE note has two key components neither is sufficient to imply or ensure “equitable” value for the investment made. These two components are the valuation cap and the discount rate. Of these two features, only the discount rate is assured. The valuation cap is NOT always specified, and even when it is specified it is subject to revocation which may result in the “cram-down” of the value to be received when the “future equity” event occurs. Angel investing is one of the highest-risk types of investment, the use of a SAFE note further exaggerates the risk to the detriment of the investor.

A SAFE is a contract. It is neither debt nor equity, just an agreement. The contract agreement indicates that the company is to distribute shares to investors in the future in exchange for money today. All this means is that the investor holds an “IOU” for equity, should equity ever be issued. It is not debt like a Note, so the investors do not have a claim on any assets of the company if things deteriorate. It is not equity, so the investors do not have any governance rights, information rights, voting rights, or any rights to help steer the company. If the company breaches the SAFE contract, what is the recourse? Perhaps only to sue the struggling startup and incur legal costs, which will not be recoverable, while forcing the company into bankruptcy in which case the SAFE holder has no claims.