How a raise changes runway
A SAFE seen from the runway: more cash, the same burn, and Northwind turned from default dead to default alive at the growth it already has.
Default alive or default dead left Northwind default dead with the hires at 5% growth. One way out is money. Suppose the founders raise $250,000 on a SAFE on Nov 2. What that does to ownership, and how the SAFE converts, is the subject of the Cap tables & raising track. Here's the finance side: the cash arrives, burn doesn't change, and the company has more months to reach profit.
A raise buys months, not a lower burn. It's financing, so it never counts as cash in when burn is measured.
On the books the SAFE money isn't revenue, and it usually isn't equity yet either. Most SAFEs are classified as liabilities until they convert, because the number of shares they settle into varies. Cash goes up and a SAFE liability goes up by the same amount. Nothing touches the income statement.
Post-money SAFE received from an investor.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 250,000.00 | |
| SAFE liability | 250,000.00 | |
| Balanced | 250,000.00 | 250,000.00 |
Financing: it appears in the financing section of the cash flow statement and nowhere in burn.
The first option grant that follows a raise works the other way. Stock-based compensation is a real expense under ASC 718, measured at grant-date fair value and spread over vesting. It moves no cash, so it lowers profit and leaves burn alone. Investors see it twice: in the P&L, and as dilution.
Raise
- Good at
Extends runway without slowing the plan
- Watch for
- Dilution
- Months of founder time, with no certainty of closing
- Best for
- A business that works and needs time to grow into its costs
Delay the hires
- Good at
- No dilution
- Keeps the company default alive on its own cash
- Watch for
Delays the work the hires would have done
- Best for
- Growth that's real but slower than planned
Cut costs
- Good at
Immediate, and fully in the founders' control
- Watch for
Hard to reverse; the people affected are real
- Best for
- When the plan was too big for the evidence
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 480-10 — Distinguishing Liabilities from Equity (opens in a new tab)Why a SAFE usually sits with the liabilities until it convertsFree after registration
- ASC 718 — Compensation—Stock Compensation (opens in a new tab)Equity awards are an expense, measured at grant-date fair value — and move no cashFree after registration
- Background reading — not an authority
- Y Combinator — SAFE financing documents (opens in a new tab)The post-money SAFE, from the firm that publishes itFree to read
- Wikipedia, “Simple agreement for future equity” (opens in a new tab)The SAFE — backgroundFree to read
- Wikipedia, “Stock dilution” (opens in a new tab)Dilution — backgroundFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- SAFECash from an investor in exchange for a right to shares in a future priced round, usually at a valuation cap or a discount. Not debt and not yet stock; because a SAFE can require cash on a change of control, it is often classified as a liability under ASC 480 and remeasured at fair value — the terms decide
- RunwayRunway is a cash and runway metric, calculated as Cash ÷ net monthly burn.Convention
- Default aliveWhether, with expenses held where they are and revenue growing at its recent rate, a company reaches profitability on the cash it already has. If not, it is default dead and its runway ends in a raiseConvention
- Net burnNet burn is a cash and runway metric, calculated as Gross burn − cash in, excluding financing inflows.
- Stock-based compensationThe cost of equity awards — options, RSUs, restricted stock — measured at grant-date fair value and recognized as expense over the service period. Non-cash, so added back in operating cash flow, but a real cost
- LiabilityA present obligation of the entity to transfer an economic benefit (FASB CON 8 ¶E37)
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Metric definitionsEvery metric in this system ships with its formula, period, inputs and source. A KPI without a definition is a number people argue about in meetings.
- Journal entry for stock-based compensationEach month of the service period, debit Stock-based compensation expense and credit Additional paid-in capital for the grant-date fair value of the awards divided over the vesting period. No cash moves and no liability is created for equity-classified awards.
- Journal entry for issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.
- Free cash flow calculatorFree cash flow is a cash and runway metric, calculated as Operating cash flow − Capital expenditures.
- Gross burn vs net burnGross burn is all the cash a company spends in a month. Net burn subtracts the cash it collects, and runway is computed from net burn.
- How to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.
- Stock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.
- Burn rate and runway: how to calculate them correctlyGross burn, net burn and months of runway, done the way an investor checks them: from cash, averaged, and with the hires you’ve already committed to.
- Cap tableThe record of who owns what in the company: common and preferred shares, options, warrants, SAFEs and notes, and the fully diluted total.
- Priced roundA financing where investors buy shares, usually preferred stock, at a set price per share. Preferred carries rights common doesn't, most often a liquidation preference.
- RunwayCardMonths of runway with a burn line.
- ScenarioCompareScenarios side by side, all measured against the base.