For Kenyan startups, securing early-stage funding can be challenging and complex, especially when navigating instruments like SAFEs (Simple Agreements for Future Equity) or convertible notes.
At WeComply Labs, we help entrepreneurs tackle these complexities, ensuring they have a solid foundation for growth and financing success. Here’s an overview of how SAFEs work and why understanding dilution is crucial for maintaining ownership and control in your startup.
What Are SAFEs, and Why Use Them?
A SAFE is a simple, founder-friendly agreement where investors provide capital today in exchange for future equity, often at the next priced round of funding (like Series A). SAFEs offer a straightforward way to bring in money without immediately negotiating complex terms like interest rates, maturity dates, or board control. They’re a popular choice globally and are catching on in Kenya for good reason:
- No Immediate Valuation Required: SAFEs let you raise capital without having to determine your company’s exact worth now.
- Simpler Documentation: Compared to convertible notes, SAFEs have fewer legal complexities, meaning lower costs and faster timeframes.
Why the Post-Money SAFE Matters
We often recommend post-money SAFEs over pre-money SAFEs for several reasons:
- Better Control of Dilution: Post-money SAFEs make it easier to track dilution. When your company raises money, the percentage of equity you give away is clear upfront.
- Accurate Cap Table: By calculating dilution in advance, post-money SAFEs allow founders to better anticipate their equity ownership after each funding round.
With a post-money SAFE, you know exactly how much you’re selling, which gives you confidence as your startup grows. This clarity is vital in building a strong foundation and attracting high-quality investors.
Understanding Dilution: Safeguarding Founder Ownership
When you take on SAFE investors, your ownership in the company decreases—a process called dilution. The key to managing dilution is knowing how each funding round will impact your stake, especially as you approach your first priced round (Series A). Here’s a simplified breakdown:
- SAFE Conversion: When the SAFE converts to equity, it typically does so at a discount, giving early investors an incentive to invest.
- Option Pool Increase: Before a Series A, startups usually increase their option pool to about 10% of the company’s shares. This further dilutes founder ownership but is critical to attract talent.
- Series A Investment: Series A investors typically seek around 20-25% of the company. Including the SAFE conversion and option pool, founders generally aim to retain about 50% post-Series A.
At WeComply Labs, we use a model that helps startups plan for these ownership changes, creating clear, actionable steps that allow you to keep control.
Practical Tips for Raising Money with SAFEs
- Don’t Over-Optimize for a Higher Valuation Cap: While it’s tempting to set a high valuation cap, raising on a modest cap can attract better investors faster and secure the capital you need without unnecessary negotiation.
- Understand Your Cap Table: The cap table is a powerful tool. It shows who owns what and how much equity is left. Track it closely with each SAFE or investment to ensure you’re comfortable with your ownership percentage.
- Avoid Mixing SAFEs and Convertible Notes: SAFEs and convertible notes serve similar purposes but have distinct implications on ownership and debt. Mixing the two can lead to complicated calculations and surprises down the road.
Role of Lead Investors and Voting Power
For larger rounds (like Series A), having a lead investor who sets terms can simplify negotiations and bring more strategic guidance to your board. However, you don’t need a lead investor to start raising capital with SAFEs—making them ideal for bootstrapping and early growth.
How WeComply Labs Supports Kenyan Startups
WeComply Labs understands the unique challenges Kenyan startups face in securing funding. We provide:
- Personalized Guidance: From setting valuation caps to structuring option pools, we walk founders through every step, making it easy to understand what’s happening to their ownership.
- Cap Table Management: We help you track your cap table accurately, ensuring you always know how much you own and how each round impacts your position.
- Modeling Dilution Scenarios: With our tools, you can anticipate how different funding rounds will impact your stake, allowing you to plan ahead with confidence.
Take Control of Your Startup’s Financial Future
At WeComply Labs, we believe knowledge is power. By educating founders about SAFEs, dilution, and cap tables, we empower you to make informed choices that will benefit your startup for years to come. If you’re a Kenyan entrepreneur seeking guidance on SAFEs or Series A preparations, connect with us at WeComply Labs. Together, we’ll build a cap table strategy that supports your long-term vision without sacrificing control or equity.
