Founders Must Understand SAFEs Before Raising Early Money

Founders - you must be familiar with SAFEs (Simple Agreement for Future Equity) if you're raising early stage money for your startup, period.

Why? Because this instrument has come to dominate rounds for nascent companies, even those that raise $4 million or so.

𝗕𝗮𝘀𝗶𝗰𝘀

• With a SAFE, investors give the founders money upfront for the promise of future equity. That future equity arrives with a "qualified financing", usually a priced round.

• SAFEs come in two flavors: pre-money and post-money. The post-money type is much more common (80%+).

• SAFEs have two "conversion terms": valuation caps and discounts. 90% of SAFEs have a valuation cap, about ~33% have a discount. Terms can be used together or separately.

• SAFEs 𝗮𝗿𝗲 𝗻𝗼𝘁 𝗳𝗿𝗲𝗲. They come with implied dilution that the founder needs to track closely, especially since post-money SAFEs give the investor the added benefit of anti-dilution if the founder raises multiple SAFE rounds.

𝗖𝘂𝗿𝗿𝗲𝗻𝘁 𝗠𝗮𝗿𝗸𝗲𝘁

• 85% of angel rounds happen on SAFEs. The rest is convertible notes (like SAFEs, but with an interest rate) and some priced activity.

• More than half of all rounds under $3M raised are on SAFEs.

• A quarter of seed rounds with $5M+ raised happen on SAFEs.

𝗣𝗿𝗼𝘀

• Speed. Signing SAFEs is quick and easy.

• Cost. Typically a much lower legal cost than a priced round.

• Valuation delayed. No need to decide on an exact valuation for a super early company that may not have product, etc.

𝗖𝗼𝗻𝘀

• Risk of overdilution to founders if multiple SAFE rounds are raised.

• Risk (to investors) of never actually owning shares should a priced round never happen.

• Risk (to investors) of lack of rights around equity (things that may have been present in a priced round like information rights, pro rata, etc).

Fundraise safely!

#startups #founders #VC #fundraising #SAFE