Fundraising is tough, so it’s no surprise that SAFE (easy settlement for future fairness) rounds are well-liked. Conceived by Y Combinator as a substitute for convertible notes, SAFEs have lengthy been thought of a founder-friendly option to wrap a enterprise deal. But, as with most issues, the actuality is that SAFEs are solely a super match for founders generally.
To learn how the startup ecosystem is doing deals proper now, TechCrunch+ not too long ago surveyed 5 founders about how they’re fascinated by much less structured rounds like SAFEs. And it seems SAFEs are nonetheless a well-liked alternative, besides just for pre-seed and seed rounds — plus fundraising between rounds. After that, although, it seems most founders would favor priced rounds.
“SAFEs continue to be an exceptionally appealing mechanism for fundraising, particularly from a founder’s perspective,” mentioned Amy Divaraniya, founder and CEO of Oova. “The ease of setup, flexibility in determining terms, and absence of a formal close date make them highly advantageous. Additionally, the streamlined nature of SAFE agreements eliminates the need for extensive legal intervention, resulting in a remarkably cost-effective process.”
While a number of founders echoed Divaraniya, saying they appreciated the velocity and flexibility of a SAFE spherical, most had a caveat: By the time a startup reaches the Series A stage, this mechanism is much less enticing for a spread of causes.
Vishwas Prabhakara, the co-founder and CEO of Honey Homes, mentioned that he’s glad his startup raised a SAFE word for its pre-seed spherical, however for its latest Series A spherical, he didn’t even take into account it.
(*5*) he added.
Both Tory Reiss, the co-founder and CEO of Equi, and Zach Blank, the founder of Hurry, agreed with that sentiment, saying founders need to pay shut consideration to how completely different investor fairness stakes will convert down the line.
“There’s a significant downside for a company (and founders/employees) with a SAFE,” Blank mentioned. “While it’s great to get investment when price can’t be determined, you need to watch out for ‘gotchas’ at the next round.”
Read on to learn how founders in the present day are utilizing SAFEs, what these rounds look like in in the present day’s much less founder-friendly market, and if investor-friendly phrases are making inroads into early-stage fundraising.
We spoke with:
- Zach Blank, founder, Hurry
- Amy Divaraniya, founder and CEO, Oova
- Tory Reiss, CEO and co-founder, Equi
- Arman Hezarkhani, founder and CEO, Parthean
- Vishwas Prabhakara, founder and CEO, Honey Homes
Zach Blank, founder, Hurry
Was a SAFE the possibility that made the most sense on your final spherical?
We raised a seed spherical ($2.5 million at a $15 million post-money valuation) in November 2021, the top of the bubble. We had a product in the market with income, however have been nonetheless very early. We had been in the marketplace for perhaps 30 days at the time we closed the spherical.
When chatting with buyers, a SAFE appeared to be the default possibility, as a result of there isn’t a actual option to value a spherical this early. So for buyers and for us, at the time, a SAFE made the most sense.
Will you utilize a SAFE in your subsequent fundraising occasion?
No. There’s a big draw back for a corporation (and founders/staff) with a SAFE. While it’s nice for getting investments when the value can’t be decided, you should watchout for “gotchas” at the subsequent spherical.
For instance, let’s say you elevate on a SAFE at a $15 million post-money valuation and a 20% low cost. If your subsequent spherical is priced at $50 million (good for you!), then all of your SAFE buyers convert at that value from a dilution perspective. They don’t get diluted at all. That’s the upside for them for being early, nevertheless it then leaves much less room for brand spanking new buyers down the line.
The most supreme state of affairs is that you just elevate at $15 million in the spherical subsequent to a SAFE with the identical cap.
Would you say SAFEs are as enticing to you as they could have been just a few years in the past? Why or why not?
No. Ideally, as a founder, you’re capable of bootstrap to a enterprise that may be priced. And should you can’t, you must elevate a really small quantity (greater than $500,000) from angels at an inexpensive value, say $2.5 million.
Massive seed/pre-seed rounds are a factor of the previous, and have been only a consequence of ZIRP and the bubble we have been in.