Mark Bivens

On May 1st, Japan’s Heisei era will officially come to an end. Following months of deliberation from an honorific council of elders, the name of the new era was unveiled last week: The two kanji characters for Reiwa are derived from the Man’yōshū, an eighth-century (Nara period) anthology of waka poetry. According to the Japanese Foreign Ministry, the English-language interpretation of Reiwa would be “auspicious harmony” or “beautiful harmony”.

Let’s examine the impact of this transaction on your cap table: Prior to this VC round, you (together with your founding team) own 100% of the company, since all outside financing to date had come in the form of SAFE notes, not equity. The VC round of $5m at $20m post, a commendable achievement for a company of your size by most benchmarks, brings your founding team’s stake down from 100% to about 53.5%. Your revenue this year will reach the high hundred thousands, maybe even $1m, but it’s more from a mish-mash of projects/pilots, and thus not of the same quality (nor of course magnitude) of the $2m in the Optimistic Case. Let’s examine the impact of this transaction on your cap table: Under this Moderate Case, the priced equity round dilutes your founder team’s holdings from 100% to 29.7% in one fell swoop, an even more precipitous drop which has induced vertigo among founders on some occasions.

The convertible note subsequently proved useful in another set of circumstances: when raising a consecutive priced round takes longer than expected and requires existing shareholders to bridge the company to give it more time. The benefit here is similar: only the market can determine the fair valuation of the company, not insiders, so the convertible note does not perturb the process, just extend the runway a bit. A founder whose startup issued subsequent layers of SAFE notes with valuation caps of 5m, 10m, and 15m respectively may see 15m as the pre-money valuation floor of their company. Finally, founders who layer SAFE notes upon SAFE notes may be ignoring an implicit signal from the market: that no sophisticated institutional investor is willing to lead a priced equity round in their company.

I’ve written before about Japan’s deep thirst for innovation in the field of artificial intelligence. Selected foreign startups will have an opportunity to mingle with world-renowned AI researchers and corporate innovation departments looking for partners or acquisitions. If your startup is working on an AI-based innovation, I encourage you to apply here Deadline to apply: March 24 (Japan time) [Hint: feel free to DM me on Twitter or email if you do apply so I can ensure your candidacy receives the right attention.]