500 Startups Investment Terms

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500 Startups, now 500 Global, is a prominent early-stage venture capital firm and accelerator. Their investment terms, while evolving over time, offer valuable insights into standard practices for seed-stage funding.

Key Terms Overview

Typically, 500 Startups invests in startups through a simple agreement called a SAFE (Simple Agreement for Future Equity) or convertible note. Both are designed for speed and efficiency, avoiding the complexities of pricing a seed round upfront.

SAFE (Simple Agreement for Future Equity)

A SAFE is not debt; it’s an agreement to provide equity to the investor in a future priced round (e.g., Series A). 500 Startups usually uses a post-money SAFE, meaning the SAFE amount is already included when calculating the company’s valuation *after* the investment.

* Valuation Cap: This sets a maximum valuation at which the SAFE converts into equity. It protects the investor by ensuring they receive a reasonable equity stake even if the company’s valuation skyrockets in the future. * Discount: The discount allows the SAFE to convert into shares at a percentage lower than new investors in the future priced round. This rewards early investors for taking on more risk. For example, a 20% discount means the SAFE converts at 80% of the Series A price. * Most Favored Nation (MFN): This clause entitles the SAFE investor to the benefit of any more favorable terms given to subsequent SAFE investors. This ensures the original SAFE holder benefits from better terms offered later. * Pro-rata Rights: 500 Startups typically requests pro-rata rights, granting them the option to maintain their percentage ownership in future rounds of funding. This prevents dilution and allows them to continue supporting promising companies.

Convertible Note

A convertible note is a debt instrument that converts into equity upon a qualifying event, usually a priced equity round. While less common for 500 Startups now, understanding the terms is still useful.

* Interest Rate: Unlike a SAFE, convertible notes accrue interest. This interest is typically added to the principal amount when converting to equity. * Conversion Discount: Similar to SAFEs, convertible notes often include a discount on the conversion price in the qualifying equity round. * Valuation Cap: This is also common in convertible notes and works the same way as in a SAFE, setting a maximum valuation for conversion. * Maturity Date: This is the date when the note becomes due and payable. If the company doesn’t raise a priced round before the maturity date, the investor may have the option to demand repayment or convert the note at a predetermined price, usually less favorable to the company.

Other Considerations

Beyond the core terms, remember these points:

* Investment Size: Historically, 500 Startups invested a relatively small amount, typically in the range of $50,000 to $150,000. While investment sizes may vary now, they typically remain in the seed stage range. * Due Diligence: 500 Startups conducts due diligence, but their focus is on speed and efficiency. They evaluate the team, the product, the market, and the overall potential of the startup. * Accelerator Program: Acceptance into their accelerator program is a key component. This program provides mentorship, resources, and networking opportunities in exchange for equity. * Location: 500 Startups, being 500 Global now, has a strong focus on international markets. Specific terms and investment thesis may vary based on geographical focus.

Conclusion

Understanding the typical investment terms used by 500 Startups provides a valuable benchmark for startups seeking seed funding. SAFEs and convertible notes offer a streamlined approach, while key terms like valuation caps, discounts, and pro-rata rights are critical to negotiate effectively. Always consult with legal counsel to understand the specific implications of any investment agreement.