I think with this idea you end up back at the note concept; what you are proposing sounds more like a loan / debt to me (if I understand you correctly?). The purpose of the safe, anyway, is to turn investors into stockholders at some point.
Well a debt/loan without a term, more like an uncallable zero coupon bond without a maturity date, rather it has a maturity 'condition'.
As you have clearly pointed out, one of the bigger issues with convertibles is that they change over time in terms of their impact on the company. The SAFE fixes that by getting rid of the debt/loan aspect, and this would do the same but bake in a fixed redemption price.
An example, you get this thing (lets call it a BOOST), which is $100K with a redemption price of $125K. Now you startup goes 18 months, then does a series A raise for 1.125M$. They redeem the BOOST for 125K, pocket the $1M, and their series A investor gets their chunk of preferred. The 'rate' on our BOOST then is 25%/1.5years or 16.6% APR.
Example 2. Same deal except the series A comes 6 months later. Now the redemption in only 1/2 year gives an effect return of 50% APR.
Example 3. Company starts, grows to a going concern, runs for 5 years and then gets bought by BigCorp, and the BOOST is redeemed. Now its effective APR is 5% (actually less than that if you're not doing simple interest etc but it illustrates the point doesn't it?)
Example 6. Startup goes poof and dissolves. BOOST is effectively at the head of the line on distribution of the asset value.
Take $100K, divide it into $10K chunks, spread it across 10 different BOOSTS with other investors in them and spread the risk still further.
So the Series A investors would essentially be cashing out the BOOST investors? I don't think any Series A investor would go for this. They want to see all the money go into company growth at that stage.
"So the Series A investors would essentially be cashing out the BOOST investors?"
Yes. But lets look at it from a couple of different perspectives before we conclude they won't like that.
First we'll assume that the Series A is much larger than the BOOST redemption cost, anywhere from about 10x to 20x. We make that assumption because it the BOOST aka "seed" round is much bigger than that the Series A looks more like a Series B than a Series A, which is to say the company valuation isn't really in a place where VCs would jump in ok?
Lets put some numbers down which makes talking about it easier.
Lets say the Series A really is 9X the BOOST so in a post money valuation with 60 percent for the company founders/employees we're looking at a cap table that is
So in the left scenario everyone stays in, and in the right hand scenario the Series A investor has effectively "bought out" the BOOST investor. (the money flow is different but the effect is the same). Lets assume that value post money was $5M.
Company value increases 5x and the company is sold for $25M.
Series A guy in the left scenario gets their liquidation preference + 36% of the remains (with participation) whereas in the right scenario they get their liquidation preference + 40% of the remains (again with participation) in the second scenario.
If the company is going to do well (and they assume it will) they do better by not having the BOOST guys in the cap table then they do with them there taking a percentage. If the company does poorly they still lose their same investment they would have lost anyway.
Things are simpler for the BOOST guy too, instead of managing dozens of small share holdings in small companies they get a smaller but faster return. This creates a reliable source of seed money for the ideas, which creates a larger pool of potential Series A investments for VC companies.
