SAFE rounds, or simple agreements for future equity, have been around since Y Combinator invented them a decade ago. But they took on a different role in 2021 when they became a fast-moving tool that helped startups close deals in mere days. Before that they were used to close really early rounds or were used between financings.
But the market looks very different now. Valuations have started to level out, and deals have slowed down. The power dynamics seem to be swinging back toward investors and out of the founder-friendly market we’ve been in for the last few years.
Investors are still seeing the value in the SAFE structure, though. TechCrunch+ spoke to seven firms about this deal format, and they all said they still thought it was largely the best option for early-stage rounds — but VCs have boundaries and would always prefer a priced round.
Earnest Sweat, the founding partner at Public School Ventures Syndicate, said he thinks SAFEs can still be a great option for people looking to raise early-stage capital — especially for those who didn’t raise at crazy valuations in 2021. But for others, Sweat said he’s not sure it makes sense anymore. “The question for established companies that are raising bridge rounds that are notes is: What is this funding bridging to, and why can’t the company raise a priced round?”
Other investors echoed this as well. Greg Smithies, a partner at Fifth Wall, said that SAFE notes can be a great option at pre-seed and seed stages, but he also said that his firm encourages founders to do a priced round instead. Companies that are using this format to avoid a down round should stop avoiding the inevitable.
“The valuations of 2021 are never coming back, and it would be disingenuous to yourself and to your limited partners (investors) to pretend that they are,” Smithies said. “So, just take the down round. Reset the valuation to the new reality that we’re currently in.”
Investors also expressed their thoughts around SAFEs without valuation caps, raising these kinds of rounds beyond the seed stage, and how they can be more investor friendly.
Who we spoke to:
- Earnest Sweat, founding partner, Public School Ventures Syndicate
- Greg Smithies, partner, Fifth Wall
- Mar Hershenson, managing partner, Pear VC
- Ryan Falvey, managing partner, Restive Ventures
- Brian Walsh, head, WIND Ventures
- Maëlle Gavet, CEO, Techstars
- Lili Rogowsky, principal, Atypical VC
- Chris Wake, founder and managing partner, Atypical VC
Earnest Sweat, founding partner, Public School Ventures Syndicate
How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?
Today’s startups (current and prospective) are looking at the market more reasonably. Most valuations are more aligned with lower multiples than we saw at the peak in 2020 and 2021. I’m seeing SAFE notes as a favorable option for pre-seed or seed companies that didn’t raise capital in the peak 2021 market or that raised at a relatively conservative valuation during that time.
I’m still seeing convertible notes getting done in this environment but it’s more favorable to newer/earlier companies rather than those in the growth stage. The question for established companies that are raising bridge rounds that are notes, is what is this funding bridging to and why can’t the company raise a priced round?
If given the choice, would you prefer your portfolio companies raised their next capital through a SAFE or a priced round? Why would you consider that to be the better option?
The preference would always be a priced round with a strong syndicate of investors because it removes some of the uncertainty of the company and business of what it should be worth.
How does a company’s sector affect how you feel about it raising through a SAFE?
Currently some verticals or product types, such as AI or generative AI, have more momentum than others, so I would have questions on why a startup within that sector/theme would not be able to raise a priced round. However, that’s the only question I would have on whether a SAFE is the right strategy based on sector. I would look more into the stage of the company or if the company has raised a price round yet or not.
Are you willing to invest in SAFE rounds that lack a cap or a discount?
It would be extremely rare for me to invest in a non-cap SAFE.
How have SAFEs come up (in either positive or negative terms) with your LPs?
I wouldn’t say they come up positive or negative, but LPs do want to understand why you decided to invest in certain rounds and why not in others. So VCs should be able to answer to themselves why a SAFE, post-seed round is advantageous no matter the macro market.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
They can be but I find them to be a valuable term structure for early-stage companies.
Were SAFEs just a ZIRP (zero interest-rate policy) phenomenon?
No. They tend to work favorably for early-stage startups in a market with a ton of dry powder.
Greg Smithies, partner, Fifth Wall
If given the choice, would you prefer your portfolio companies raised their next capital through a SAFE or a priced round? Why would you consider that to be the better option?
We are generally pushing entrepreneurs to do priced rounds. In a down market, people try to kick the can down the road and do a SAFE or do a convertible to avoid taking the down round. But we see that as delaying the inevitable. The valuations of 2021 are never coming back and it would be disingenuous to yourself and to your limited partners (investors) to pretend that they are. So, just take the down round, reset the valuation to the new reality that we’re currently in.
Has your interest in SAFEs and other, related investment forms changed due to your experiences with how they “convert” during later priced rounds?
We are seeing a lot more deals out there set up as SAFEs or convertibles because people tend to be afraid to take the down round; so the quantity of these deals has increased recently. We prefer to take the pain, doing a priced round.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
No, they are just a tool. And the terms in them can be made founder friendly or unfriendly or ratcheted up or down to match the macro environment. They are a tool that could be utilized in good market times or bad market times.
Mar Hershenson, managing partner, Pear VC
How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?
Questions on SAFEs are mostly around valuations. We have seen large fluctuations in SAFE prices for pre-seeds and seeds since May 2021.
If given the choice, would you prefer your portfolio companies raised their next capital through a SAFE or a priced round? Why would you consider that to be the better option?
It’s important to note that not all SAFE terms are the same.
Founders tend to prefer SAFEs. A lot of that is rooted in not having control provisions and it’s possible to complete a faster raise with lower legal costs. It is also easier to pile on a lot of smaller investors. As investors, a SAFE investment can also be fast and it reduces liabilities, since you are not a shareholder, a board member, etc. I think there is large value [in] doing a priced round, because typically (but not always) the lead investor will get a board seat and commit their time and effort spent on the company.
We don’t see SAFEs at Series A and beyond.
Are you willing to invest in SAFE rounds that lack a cap or a discount?
Not typically. It would have to be a truly exceptional case. I think we’ve only done this a few times in the last decade, but in those cases, it would’ve been bridges into next rounds when we wanted the follow-on investor to price it.
Will SAFEs retain their “standard investment vehicle” demarcation this year?
Yes, for pre-seed and seed rounds, based on what I’m seeing.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
In general, pre-seed and seed [are] very active, and we are not seeing major adjustments to SAFEs.
Were SAFEs just a ZIRP (zero interest-rate policy) phenomenon?
I’m not seeing this happen yet at seed. This may be happening in later rounds where the amounts of cash are higher and risk returns are different.
For us, issuing pre-seed and seed SAFEs is fairly binary in terms of fund returns. You need to have companies that figure out product market fit with high growth that are able to raise a healthy Series A. For those companies, the interest you forgo on a SAFE note is typically small (although, of course, always nice to have).
Ryan Falvey, managing partner, Restive Ventures
How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?
Mostly around price. First they went up, then they went down. The instrument is very well understood at this point.
If given the choice, would you prefer your portfolio companies raised their next capital through a SAFE or a priced round? Why would you consider that to be the better option?
Typically a pref issuance as it is more commonly associated with a stronger lead and less ongoing financing risk. Basically, it’s a lot more certain. Also, since we don’t “mark” our positions against future SAFEs, we don’t see new safes as a necessarily positive intermediate step as we would a priced round at a step up in valuation.
Are you willing to invest in SAFE rounds that lack a cap or a discount?
Very, very, rarely.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
No, they’re very useful at the earliest stages.
Brian Walsh, head, WIND Ventures
How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?
In the past, the standard SAFE seemed to include just a valuation cap. Over the past two years, we have seen an evolution of SAFEs to include a discount rate and valuation cap terms (whichever is more favorable at conversion wins), similar to convertible notes. Today with the market resetting, I am not seeing much traction with SAFEs from startups, as convertible notes offer investors better downside protection.
For our own portfolio, most funding discussions involve convertible notes, extensions of prior rounds or newly priced financings (not SAFEs).
If given the choice, would you prefer your portfolio companies raised their next capital through a SAFE or a priced round? Why would you consider that to be the better option?
My advice to our portfolio is that a SAFE is fine to bridge the gap between its financing round if achievable, although default thinking is that in the current investor-friendly environment, investors will want more rights that is offered via SAFEs, such as an interest yield and the downside protection offered via a convertible debt structure.
A priced round is always best when a key milestone has been achieved because you secure valuation conviction, gain a new lead investor and update the board. It’s the most visible and impressive signal to the market that a startup is “doing well.”
How does a company’s sector affect how you feel about it raising through a SAFE?
We don’t see a clear correlation between sector and structure.
Are you willing to invest in SAFE rounds that lack a cap, or a discount?
In this market, it is very unlikely that we’ll invest in a SAFE without a cap or discount because the market is such that in all likelihood better structures and terms for investors can be won, though the structure needs to match the circumstances.
Has your interest in SAFEs and other, related investment forms changed due to your experiences with how they “convert” during later priced rounds?
For new investments, my preference is always a priced round with a very strong lead and syndicate. For follow-on investments, circumstances dictate what the right options are.
Will SAFEs retain their “standard investment vehicle” demarcation this year?
My belief is that in this market, preferences will change as startup investors will likely lean toward structures that offer more options for incentives (carrots or sticks) and better downside protection in this market.
As the market is less favorable, it is harder to fundraise (investors are generally being more patient and demanding). As a consequence, startups will need to entice investors to invest more than in prior years. This might include adding 2x or 3x preference for investors that invest at certain thresholds (an example of a carrot incentive). It might also include converting to common all of an investor’s preferred shares if they do not invest at a certain threshold (called pay-to-play and an example of a stick incentive). These sorts of terms guide toward non-SAFE structures such as a convertible note.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
There’s a time and a place for things. There will be an evolution of structures and terms that follow the market evolution.
Were SAFEs just a ZIRP (zero interest-rate policy) phenomenon?
Perhaps born in part due to the zero-interest rate environment, but they are part of the VC toolbox, which is good for VC, startups and tech in general. I think SAFEs will survive as part of this toolbox and evolve over time.
Maëlle Gavet, CEO, Techstars
How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?
The questions haven’t really changed. Most of our companies are still raising SAFEs or convertible notes. There is a thought that in the current market, the power shifts to investors and that there will be more priced rounds. That hasn’t materialized yet.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
We are continuing to see SAFEs survive at the pre-seed and seed level, even in this more conservative environment.
If given the choice, would you prefer your portfolio companies raised their next capital through a SAFE or a priced round? Why would you consider that to be the better option?
We encourage our portfolio companies to raise whatever amount they need in the format that makes sense for them. Depending on the company and where they are, SAFEs may be the only or right option. However, there are the optics that a priced round is when the institutional venture clock starts, so from a forcing function, it may help founders introspect about how they want to manage and grow their business. Naturally, we see largely our Series A and B rounds to be priced rounds.
Has your interest in SAFEs and other, related investment forms changed due to your experiences with how they “convert” during later priced rounds?
No, interest has not shifted. We will participate in whatever instrument makes sense for the company [outside of our accelerator fund].
Lili Rogowsky and Chris Wake, Atypical VC
How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?
The SAFE is so broadly accepted that most individuals do not question the appropriateness of it, regardless of the situation. We have even seen late-stage deals where a SAFE is the chosen option; most, but not all, of those situations involved a strategic investor that opted for a SAFE as a way to avoid the valuation question.
If given the choice, would you prefer your portfolio companies raised their next capital through a SAFE or a priced round? Why would you consider that to be the better option?
It is less about drawing a hard line around which method/instrument is “correct” across the board, and more about taking the time to be deliberate in a given situation.
How does a company’s sector affect how you feel about it raising through a SAFE?
Frontier/deep tech ventures require more thought, particularly as these may be tackling acute technical challenges where the solution is unknowable at the time of investment. The venture may need to raise many successive rounds of capital, and if they continue to use the SAFE as a default, they can quickly create complications in their cap table and/or challenges for themselves when raising their first priced round.
Are you willing to invest in SAFE rounds that lack a cap or a discount?
An uncapped SAFE with a discount can be an appropriate vehicle for interim rounds, particularly where one is adding one or two strategic investors ahead of a priced round, but we actively avoid these scenarios at pre-seed due to the misaligned incentives.
Many investors draw a hard line against an uncapped SAFE.
Has your interest in SAFEs and other, related investment forms changed due to your experiences with how they “convert” during later priced rounds?
The primary concern is deploying capital carefully and deliberately in the form that makes sense in a given circumstance. This includes a clear understanding of the cap table math and possible outcomes upon conversion, which can be less explicit with a SAFE.
Will SAFEs retain their “standard investment vehicle” demarcation this year?
I would think so. Any change to this standard would be slow. SAFEs provide the path of least resistance today, but they should be used deliberately and with consideration given to the downstream capital requirements of each company.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
Likely not. SAFEs can be equally investor friendly, especially for angels, friends and family, and early institutional checks.
Were SAFEs just a ZIRP (zero interest-rate policy) phenomenon?
I can see the comparison. SAFEs are a deferment of cost, not necessarily a reduction. That is not to say there isn’t a clear benefit to cost deferment for cash-strapped startups, but they should always be cautiously aware of the road ahead.