What does this imply about the valuation of the company from an employee stock plan perspective? One of the nice things about convertible debt is that the investment is offset by an equal liability, providing a reasonable justification for continuing to issue stock to employees very cheaply. Does unencumbered cash (ie enterprise value) increase the risk of things like cheap stock charges? Can you use restricted stock with a safe or would you want to stick to ISOs and the 409(a) rules?
Great question. Re: the implied valuation of the company, I don't believe it will be different from the notes. The safe will convert to preferred stock, and while the price of the preferred stock certainly affects the price of the common, I think it would be hard to say that a prospective valuation for an event in the future increases immediately increases the value of the common stock.
I guess I'm not asking about the implied cap from the future conversion into preferred, but the EV stemming from the mere ownership of, say, a million dollars by the company. We use restricted stock that vests by lapsing a right to repurchase, since it's cheaper for the employee (no cost associated with the option itself) and it starts the long term cap gains clock right away. This makes them a direct shareholder, though, and if the only stock outstanding in the early days is common, it seems like the cash-related EV would have to be attributed to it, right?
Strictly speaking this should increase the common value relative to common under the equivalent convertible note because, as designed, the terms of the Safe are more favorable to common than a convertible note.
However, like a convertible note, the Safe does not place a valuation on the company at the time of its issuance, merely a cap; and almost always it will be used only when no prior preferred round has established such.
So for 409a appraisals, which, for seed-stage companies, rely heavily upon expectations about a future round, there will be relatively little impact. Namely the preference of the projected future financing will be slightly smaller relative to the note scenario, for the reasons detailed in this thread. This will increase the common value a bit, but not much.
An exception might be if the appraiser bases his conclusions on a balance sheet metric that comes out differently without the liability you mention, which is not as common.
