Paper capital contributions as YC SAFE that converts to common stock?

Question

I am slowly ramping up on the options my co-founder and I have to make capital contributions to our bootstrapped C Corp. When we incorporated we each purchased 40% of the available common stock and set aside 10% for early staff leaving 10% available. My proposed strategy is to track all founder capital contributions as SAFEs that will convert to equity issued from the remaining 10% common stock in Series A. All other stock (ESOP or VC) will be sold as preferred stock. Is this a sound strategy? If not, how would you adjust it for a founder team that would prefer not to track capital contributions as debt?

hdmoore · Accepted Answer

Tracking capital contributions as debt is the best choice (after incorporation). Pay yourself back 6% non-compounding interest and make things easy. Don't buy your own equity just to cover short-term expenses. Reach out (email in profile) if you would like to see a template.
Alternatively, refile your articles and stock purchase agreement and tie that capital to the stock purchase or initial contribution. I would still recommend founder loans instead. If you use a SAFE or other convertible debt on amazing terms, future investors may ask for the same terms.
Edit: I financed my startup (https://rumble.run) that way and paid myself back a month ago. Painless all around.

dcaisen · Answer

Not sure if it's the optimal approach, but this is pretty much exactly what we did. At the onset of the company, I made a capital contribution (beyond the small purchase amount of our founder stock) using a standard YC SAFE with no valuation cap/discount (with an MFN clause). When we later raised a friends and family round, we did so via a SAFE as well, this time with a valuation cap, and I swapped my initial SAFE for the F&F SAFE, and we basically just considered it part of that round.The second part of your plan is unclear to me. When you issue employees options, those will generally be options to buy common stock, not preferred. And if and when you raise a priced VC round for preferred shares, all of your SAFEs will then convert to preferred shares.

arcticbull · Answer

Could each of you just agree to contribute roughly the same quantity of capital and keep the cap table as 40-40-10? Or find some other way of balancing it out that doesn't involve the lawyers? That would save you both a lot of headache and paperwork.

dustingetz · Answer

how much money are we talking about and how much time since incorporation? and what will the money be used for?