<aside> 🏆 We created a new kind of uncapped safe, the most founder-friendly safe yet. The valuation can go higher, but not lower.

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(If you’re unfamiliar with safes and the terminology in this post, see this informative explanation of safes. We’ll issue a user guide and public documents soon.)

The Neo Safe with Floor Valuation is uncapped: it will convert into equity at a price to be determined based on a subsequent financing. The conversion valuation can go higher when you raise more in a qualifying subsequent round; it won’t go below the Floor Valuation even if your subsequent round is at a lower valuation.

To qualify for increasing the valuation, the subsequent financing must be at least as much money as the original safe, and must occur within a designated time (e.g. 6 months). Also, there’s a pro rata right allowing the investor to maintain their ownership percent by investing more cash. These investor protections balance the exposure of offering a Floor Valuation.

<aside> ✅ The Neo Safe with Floor Valuation can be useful in many situations, and we intend to make it publicly available and open-sourced. Get notified when it’s available.

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Benefits to founders

If you’re a founder, the Neo Safe with Floor Valuation gives you many advantages:

• Unlimited upside, limited downside. Because it’s uncapped, the safe can convert into equity at an arbitrarily high price, based on the subsequent round. Meanwhile, the conversion price won’t go below the Floor Valuation.
• Strong signal to the market. The Floor Valuation conveys a powerful message of conviction to future investors, because the safe buyer is taking a risk and betting that the next round’s valuation won’t be below the Floor. This signal of confidence may help you raise your subsequent round at a higher valuation.
• Help with recruiting due to known dilution %. The Floor Valuation mitigates a problem with uncapped safes: the challenge of telling candidates what their stock offer means. (With a regular uncapped safe, you have no idea what % the dilution from the safe will be until it converts to equity; as a result, no shareholder — including future recruits — can know what % of the company they own.) The Floor Valuation establishes a ceiling on dilution from the safe, so you can estimate every shareholder’s minimum ownership %. This transparency and predictability will help you with recruiting.

Benefits to investors

If you’re an investor, the Neo Safe with Floor Valuation can help you win deals and secure ownership in ways that might not otherwise have been possible.

• Get into deals without leading round (better than Valuation Cap). The Neo Safe with Floor Valuation may help you win allocation in a company without leading the round. (If you’re not leading the round, founders may not want to accept a Safe with Valuation Cap because it signals a price anchor that could be below market.)
• Known ownership % due to pro rata right (better than Uncapped). The Floor Valuation suggests an ownership % and becomes the basis for a pro-rata right. Even if the actual conversion valuation is higher in the subsequent round, this pro-rata right gives you a path to maintain your desired % ownership amount by contributing more cash at the higher valuation. (In contrast, with a regular uncapped safe, you have no idea what % ownership you’ll end up with. Investors hate this uncertainty: even the most valuation-insensitive VCs usually have ownership targets.)
• Time bound on uncapped period. The Neo Safe with Floor Valuation designates a time window (e.g. 6 months) for a subsequent financing to qualify for increasing the conversion valuation. If there’s no qualifying financing within this time, the conversion valuation is fixed at the Floor Valuation. (This eliminates one of the problems with regular uncapped safes: the worry that the company doesn’t raise another round until reaching an astronomical valuation, leaving you with negligible ownership.)

Balance of interests

Compared to a regular uncapped safe, the Neo Safe with Floor Valuation is better for both founders and investors. The pro rata right is a material economic benefit to investors. In return, founders get a huge signal of conviction that can help raise the next round at a higher valuation. The structure elegantly balances both parties’ interests.

• Aligned incentives (due to known ownership %). The Floor Valuation mitigates the biggest problem with uncapped safes: the misalignment of incentives between founders and investors. (In a regular uncapped safe, the investor has no idea what % they own until it converts to equity; and the more successful you are, the less they’ll own. This is a perverse incentive.) With the Floor Valuation, the investor knows what % they expect to own, and the pro rata right lets them secure that ownership by putting in more cash if necessary at the conversion valuation. Everyone behaves better when incentives are aligned.

Example use cases

We intend to use the Neo Safe with Floor Valuation in multiple situations: