Fundraising is hard, so it’s no wonder that SAFE (simple agreement for future equity) rounds are popular. Conceived by Y Combinator as an alternative to convertible notes, SAFEs have long been considered a founder-friendly way to wrap a venture deal. But, as with most things, the reality is that SAFEs are only an ideal fit for founders sometimes.
To find out how the startup ecosystem is doing deals right now, TechCrunch+ recently surveyed five founders about how they’re thinking about less structured rounds like SAFEs. And it appears SAFEs are still a popular choice, except only for pre-seed and seed rounds — plus fundraising between rounds. After that, though, it appears most founders would prefer priced rounds.
“SAFEs continue to be an exceptionally appealing mechanism for fundraising, particularly from a founder’s perspective,” said 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 several founders echoed Divaraniya, saying they liked the speed and flexibility of a SAFE round, most had a caveat: By the time a startup reaches the Series A stage, this mechanism is less attractive for a variety of reasons.
Vishwas Prabhakara, the co-founder and CEO of Honey Homes, said that he’s glad his startup raised a SAFE note for its pre-seed round, but for its recent Series A round, he didn’t even consider it.
“Due to how dilution works, it usually doesn’t make sense to stack rounds using SAFEs, in my opinion,” 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 have to pay close attention to how different investor equity stakes will convert down the line.
“There’s a significant downside for a company (and founders/employees) with a SAFE,” Blank said. “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 find out how founders today are using SAFEs, what these rounds look like in today’s less founder-friendly market, and if investor-friendly terms 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 option that made the most sense for your last round?
We raised a seed round ($2.5 million at a $15 million post-money valuation) in November 2021, the height of the bubble. We had a product in the market with revenue but were still very early. We had been in the market for maybe 30 days at the time we closed the round.
When speaking to investors, a SAFE seemed to be the default option, because there is no real way to price a round this early. So for investors and for us, at the time, a SAFE made the most sense.
Will you use a SAFE in your next fundraising event?
No. There’s a significant downside for a company (and founders/employees) with a SAFE. While it’s great for getting investments when the price can’t be determined, you need to watch out for “gotchas” at the next round.
For example, let’s say you raise on a SAFE at a $15 million post-money valuation and a 20% discount. If your next round is priced at $50 million (good for you!), then all your SAFE investors convert at that price from a dilution perspective. They don’t get diluted at all. That’s the upside for them for being early, but it then leaves less room for new investors down the line.
The most ideal scenario is that you raise at $15 million in the round subsequent to a SAFE with the same cap.
Would you say SAFEs are as attractive to you now as they might have been a few years ago? Why or why not?
No. Ideally, as a founder, you’re able to bootstrap to a business that can be priced. And if you can’t, you should raise a very small amount (more than $500,000) from angels at a reasonable price, say $2.5 million.
Massive seed/pre-seed rounds are a thing of the past and were just a result of ZIRP [zero interest-rate policy] and the bubble we were in.
In SAFEs, how much more common have investor-friendly terms (discounts, lower caps, MFN clauses, etc.) become in recent quarters?
We did a standard SAFE, including a discount and MFN [most favored nation]. I think as it continues to be harder and harder to raise, instead of changing terms on a SAFE, there will be fewer early-stage deals.
When raising your last round, did you find that VCs or other investors were more interested in a traditionally priced round than SAFEs than before? How did this affect your approach to fundraising?
A SAFE was the only thing discussed. This was also because the investors were eager to move quickly (as were we), and a SAFE is very straightforward to execute. We went from the first meeting to term sheet to close in 10 days.
Will SAFEs retain their “standard investment vehicle” demarcation this year?
Unlikely. It’s harder to raise right now and things will stay that way, possibly until the end of the decade. I don’t see the need for SAFEs in this environment.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
Depends on the terms and what happens next. I think you need a crystal ball when signing a SAFE on each deal to determine that. Similar to asking if something was a good investment. You don’t know until you know.
Were SAFEs just a ZIRP (zero interest-rate policy) phenomenon?
Yes.
Amy Divaraniya, founder and CEO, Oova
Was a SAFE the option that made the most sense for your last round?
For our latest round, we did not employ a SAFE. Nevertheless, it is worth noting that the SAFE offers a streamlined and accessible means of obtaining funding without incurring exorbitant legal expenses.
Will you use a SAFE in your next fundraising event?
It is certainly a possibility. In the past, we have utilized SAFEs in situations where unexpected fundraising needs arose, and expediency in securing the necessary funds was crucial.
As for employing a SAFE in our upcoming round, it will depend on the circumstances of our company and the prevailing economic climate. If the conditions align and there is a need for fundraising, I would unquestionably consider utilizing a SAFE to facilitate the process.
Would you say SAFEs are as attractive to you now as they might have been a few years ago? Why or why not?
SAFEs continue to be an exceptionally appealing mechanism for fundraising, particularly from a founder’s perspective. 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.
Considering the present economic climate, many investors exhibit a lower inclination to make substantial investments compared to just a few months ago. In this context, SAFEs offer a compelling solution by enabling investors to contribute with an investment while still securing their desired valuation. This mutually beneficial arrangement serves as a win-win for both founders and investors, accommodating their respective preferences and objectives.
How much more common have investor-friendly terms (discounts, lower caps, MFN clauses, etc.) in SAFEs become in recent quarters?
I have observed a nuanced approach to investor-friendly terms in SAFEs. The founder plays a pivotal role in shaping these terms, as they hold the reins. However, it is important to strike a balance to attract investors without undermining the founder’s motivation to drive the company’s success.
Moreover, it is crucial for the terms to align with prevailing market conditions. For example, in today’s market, if a founder includes a valuation cap, it must reflect the current valuation landscape and the stage of the company.
When raising your last round, did you find that VCs or other investors were more interested in a traditionally priced round than SAFEs than before? How did this affect your approach to fundraising?
There appears to be a heightened inclination among investors to opt for SAFEs over traditional priced rounds, particularly when the funding amount is relatively modest. This evolving dynamic has prompted us to adjust our approach to funding rounds accordingly.
We remain cognizant of the importance of tailoring our approach to the circumstances of each funding round, including considering alternative options if they better suit the needs of our company and potential investors.
Will SAFEs retain their “standard investment vehicle” demarcation this year?
Yes. SAFEs continue to be the preferred method for investment, particularly when seeking funding outside of a traditional priced round.
I expect SAFEs to retain their prominence and desirability as a go-to option for both founders and investors this year.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
I do not believe SAFEs were rendered unsustainable in a more conservative venture climate. In fact, their inherent advantages lend resilience to their viability. The simplicity and ease of implementation stand out as the primary advantage of SAFEs for founders.
Compared to conventional convertible notes, SAFEs feature lighter and more straightforward terms, streamlining the funding process and making it significantly more manageable. Additionally, the minimal legal involvement required contributes to cost-efficiency.
These benefits collectively reinforce the sustainability of SAFEs, even in a more cautious venture climate.
Were SAFEs just a ZIRP phenomenon?
No, SAFEs were not solely a product of the ZIRP era. While the absence of interest certainly enhanced their appeal, the true value of SAFEs lies in the standardization of terms they offer.
The uniformity in terms across SAFEs simplifies the agreement process and contributes to greater ease in securing investor buy-in. Moreover, the inability to modify the terms of a SAFE adds an additional layer of convenience, streamlining the signing-off process.
Tory Reiss, CEO and co-founder, Equi
Was a SAFE the option that made the most sense for your last round?
A SAFE was not the option that made the most sense in our last round because we did a priced Series A round.
Will you use a SAFE for your next fundraising event?
We might use a SAFE in between Series A and Series B. For example, if we wanted to do a Series A-2, we would consider a SAFE or using an extension of our Series A paper.
Would you say SAFEs are as attractive to you now as they might have been a few years ago? Why or why not?
I think that SAFEs are extremely attractive, mainly because of their flexibility and acceptance within the broader investor community. They are simple, lightweight, and there are low legal expenses.
In terms of flexibility, you can do things like discounts, caps, and you can stack SAFEs. The biggest thing is making sure you model the conversion dynamics appropriately so that you understand how those SAFEs are converting and how much equity is actually at stake.
In SAFEs, how much more common have investor-friendly terms (discounts, lower caps, MFN clauses, etc.) become in recent quarters?
It depends on the company. If you are a strong company with traction or a high-value founder, you can still demand founder-friendly terms. However, the environment has changed and capital is a bit less available. Seed rounds are still happening, and earlier rounds are where you see SAFEs more commonly. SAFEs are less common in later-stage rounds.
There’s still a good amount of early-stage funding available. So, while the prices have come down with lower caps, you aren’t actually seeing that many investor-friendly terms introduced in SAFEs aside from just changes in valuations in the major markets like Silicon Valley and New York.
That could still change, but there isn’t as much of an incentive for investor-friendly terms in the earliest rounds. Those become more common in later rounds, where investors have more leverage.
When raising your last round, did you find that VCs or other investors were more interested in a traditionally priced round than SAFEs than before? How did this affect your approach to fundraising?
It was a Series A, so investors wanted a traditional priced round.
Will SAFEs retain their “standard investment vehicle” demarcation this year?
I believe so. There is yet to be a more flexible instrument that will supplant it, so for the foreseeable future, it will remain the kind of standard security that’s used to raise capital.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
Investors like SAFEs as well because they reduce the friction of the fundraising process, they’re familiar with the terms, and it reduces the cognitive burden. I think SAFEs will survive, but in a more conservative climate, investors might start asking for standard SAFE clauses and standard side letters to put alongside SAFEs.
Were SAFEs just a ZIRP phenomenon?
Uncapped SAFEs were a ZIRP phenomenon, and the expectation that a SAFE cap is equivalent to an actual valuation was as well. Many entrepreneurs are in for a rude awakening as they realize that when they’re forced to take a priced round that comes in beneath the caps of multiple stacked SAFEs, they’re going to be diluted to oblivion.
That said, SAFEs themselves are here to stay; they’re empowering for both founders and investors, particularly at the earliest stages.
Arman Hezarkhani, founder and CEO, Parthean
Was a SAFE the option that made the most sense for your last round?
Absolutely. We wanted to move quickly, which the SAFE helped with because it’s simple, well-understood, and it limits the negotiation to a few key terms.
After that, we offered reasonable terms and we tracked the cap table carefully so as to not sell too much. This ensured that SAFEs have remained a good friend.
Will you use a SAFE for your next fundraising event?
Likely not. Based on the size of our next round, we’ll probably do a priced round. But I’m certainly open to it.
Would you say SAFEs are as attractive to you as they might have been a few years ago? Why or why not?
Yes. SAFEs still have the same strengths and weaknesses as they did before. When used properly, they’re effective tools for simplifying deals and getting them done quickly.
In SAFEs, how much more common have investor-friendly terms (discounts, lower caps, MFN clauses, etc.) become in recent quarters?
We’re certainly in more investor-friendly times, but you’ve got to remember that we’re comparing this to two years ago, when a founder would name a valuation and investors would trip over themselves to outbid one another.
That’s no longer the case, but investors aren’t necessarily behaving hawkishly, either.
The changes really come down to more reasonable diligence processes and more reasonable (read: lower) caps. At the end of the day, if an investor sees a good company at a reasonable price, they’ll want to come in.
Building that conviction is taking a bit longer, but the conviction is still there.
When raising your last round, did you find that VCs or other investors were more interested in a traditionally priced round than SAFEs than before? How did this affect your approach to fundraising?
No. Investors just want good deals. Investing in a great company via a SAFE is still a better deal than missing out on that company (or investing in a worse company’s priced round).
Will SAFEs retain their “standard investment vehicle” demarcation this year?
For pre-seed rounds and seed rounds, yes, but I think these rounds will get smaller. For consumer companies, I think pre-seed deals might be hard to come by. So it could be said that the average size of a round that uses a SAFE will go down.
Were SAFEs too founder-friendly to survive a more conservative venture climate? Were they just a ZIRP phenomenon?
SAFEs are just a document. The investors who did no diligence, came in at outrageous prices and invested in crappy companies are certainly a ZIRP phenomenon. So are the excitable founders who entertained those deals (and built the crappy companies).
Did SAFEs enable that behavior? I guess that could be an argument, but it’s not a strong one — a lack of discipline will lead to bad deals regardless of the investment vehicle.
But there are countless founders and investors who remained even-keeled and kept prices reasonable. They’ll be fine regardless of the investment vehicles they use to engage with one another.
Vishwas Prabhakara, founder and CEO, Honey Homes
Was a SAFE the option that made the most sense for your last round?
For our pre-seed round, yes. It’s a no-brainer for the first fundraise, because the documentation is standardized; you can collect checks as you go, so you don’t need to have a formal closing; and based on demand, you can update the terms as needed.
They are also easily understood by founders and investors as a standard instrument. Lastly, I’ve previously used convertible notes, and SAFEs are a superior instrument for the types of outcomes tech startups are trying to build.
Will you use a SAFE for your next fundraising event?
We did not for our Series A and likely will not for future fundraising. Due to how dilution works, it usually doesn’t make sense to stack rounds using SAFEs, in my opinion.
Would you say SAFEs are as attractive to you now as they might have been a few years ago? Why or why not?
For a startup’s first round, I can’t think of a better or simpler way to do it. If you have significant revenue or profit, it may make sense to do a priced round, but that’s usually not the case.
In SAFEs, how much more common have investor-friendly terms (discounts, lower caps, MFN clauses, etc.) become in recent quarters?
I think good founders use the standard YC template and then push back on all changes. Sometimes, for a bigger check or a fund that has specific requirements, there might be a side letter. That’s OK if you’re getting value (check size, advice, etc.), but it’s best to avoid it if possible.
Keeping everything “vanilla” preserves maximum flexibility for the company, which is the founder’s goal.
When raising your last round, did you find that VCs or other investors were more interested in a traditionally priced round than SAFEs than before? How did this affect your approach to fundraising?
At the earliest stages, I haven’t had, nor have I heard of, investors asking for priced rounds. You’re pricing on nothing. The valuation cap is, of course, subject to negotiation on SAFEs. That is easier to do than negotiate a priced round.
For our Series A, it was clear that a priced round made sense, as we had previously done a pre-seed round with SAFEs, and we had enough scale in the business that we could make a justification for a priced valuation versus a valuation cap with a SAFE.
Will SAFEs retain their “standard investment vehicle” demarcation this year?
I don’t see any reason why that would change. As founders, unless there is a better standard, it’s in our best interest to hold firm on using SAFEs so we can prioritize building the company instead of negotiating financings and spending legal fees.
Were SAFEs too founder-friendly to survive a more conservative venture climate?
I don’t think so. In order for VCs to be successful, they need a broad set of founders building amazing companies. Building more friction is not a valuable use of the VC ecosystem’s time. Time is better spent making sure everyone getting into business together wants to be in business together at the earliest stages of the startup journey.
Were SAFEs just a ZIRP phenomenon?
I would be surprised if this was the case. SAFEs are simply a better version of convertible debt notes, which were used in a non-ZIRP environment. In addition, the cost barriers to launching a startup have come down considerably over the last 20 years.
SAFEs are an example of this lower cost, as is AWS, organic customer acquisition channels, and more.