Mastering the SAFE note 💸 If you're an early-stage founder, get familiar with SAFEs. 89% of all the money raised in pre-seed rounds went through SAFEs instead of convertible notes in Q4 2023. SAFEs don't neatly fit into the debt or equity category, and they don't accrue interest. This will prepare founders to approach investors and secure funding through a SAFE Note: 𝗙𝗶𝘃𝗲 𝗗𝗶𝗳𝗳𝗲𝗿𝗲𝗻𝘁 𝗧𝘆𝗽𝗲𝘀 - Fixed Conversion at a future date - Valuation Cap, no discount - Discount, no valuation cap - Valuation Cap & Discount - MFN (Most Favored Nation) 𝗘𝘅𝗮𝗺𝗽𝗹𝗲: 𝗦𝗲𝗲𝗱 𝗥𝗼𝘂𝗻𝗱 📈 Investor invests $25,000 with a $5m Valuation Cap, 20% Discount. - Pre-money valuation of the company $10m - Number of Shares= 2m - Share Price= $10m/ 2m= $5 𝗢𝗽𝘁𝗶𝗼𝗻 1️⃣ (Discount) - Share Price after discount: $5 * (1 - 20%) = $4 - Total Number of Shares: $25,000 / $4 = 6,250 shares 𝗢𝗽𝘁𝗶𝗼𝗻 2️⃣ (Valuation Cap) - SAFE Investor choosing $5m valuation cap - Share Price= $5* ($5m Valuation Cap/ $10m pre-money valuation)= $2.50 - SAFE Investment= $25,000 - Total Number of Shares= $25,000/ $2.50= 10,000 - SAFE Investor will apply the Valuation Cap option; $2.50/ share. - Finally, the total number of Shares for SAFE Investor= 10,000 - Share Price at Seed $5 - Share Value of SAFE Investors= 10,000*$5= $50,000 - SAFE Investment= $25,000 - Unrealized Return= (($50,000- $25,000)/ $25,000)* 100%= 100% 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼 2️⃣ - VC Firm Invests at a Pre-Money Valuation = $6 Million - Total number of shares 2m - Share Price= $6 m/ 2m= $3 𝗢𝗽𝘁𝗶𝗼𝗻 1️⃣ (Discount) - SAFE Investor Choosing Shares at 20% Discount - Share Price= $3*(1-20%) = $2.4 - Total Number of Shares= $25000/ $2.4= 10,417 𝗢𝗽𝘁𝗶𝗼𝗻 2️⃣ (Valuation Cap) - SAFE Investor choosing $5m valuation cap - Share Price = $3* ($5 Million Val Cap/ $6 Million valuation) = $2.5 - Total Number of Shares= $25,000/ $2.5= 10,000 - SAFE Investor will apply the Discount; $2.4/ share. - Total number of Shares for SAFE Investor= 10,417 - Share Price at Seed = $3 - Share Value of SAFE Investors= 10,417*$3= $31,251 - SAFE Investment= $25,000 - Unrealized Return= (($31,251- $25,000)/ 25,000)*100%= 25% The higher the Valuation Cap in the SAFE round, the better it is for the Founder, resulting in a lower dilution of Equity provided the Founders are confident to close the next round at a higher than the valuation cap. 𝗠𝗙𝗡 𝗖𝗹𝗮𝘂𝘀𝗲 - Let’s say SAFE A has an MFN Provision. - If a new SAFE B is issued, the company has to tell SAFE A about it. - If the terms of SAFE B are better than SAFE A, SAFE A can ask for the same terms as SAFE B. Thanks to Fazlur Shah for the math illustration and share! Some top-tier follows on the topic: - Chris Harvey, a fund lawyer who regularly drops pearls of wisdom - Peter Walker, who shares data on SAFEs and broader startup insights #startups #fundrasing #venturecapital ____ Enjoy this? Follow Kevin Jurovich for daily startup & VC insights and the occasional meme. ✌️
Actually helpful things on LinkedIn? Are you sure you don’t have a stolen video and some sort of pointless “never give up” message?
Where'd you get a pic of me when I was a kid in the 70s? 😂
Wait, you guys actually read these?
South African commercial Lawyer here. You’d be surprised how little understood SAFEs are by founders, lawyers and early stage investors here. The simplicity often leaves a lot unsaid/stated from a legal clarity perspective. This is a useful explainer and some Good resources
Dear Kevin Jurovich Thank you for sharing your thoughts. This is an enriching, valuable and comprehensive overview of SAFE notes. However, suggesting that a higher valuation cap is always better for founders seems oversimplified. Doesn't this approach risk straining investor relations if the next funding round doesn't meet expectations? How should founders balance securing favorable terms with maintaining strong investor relationships?
Clerky makes raising on SAFEs super easy. It’s the default for early stage, disregard anyone on this thread who says otherwise. If this is news to you, suggest reading: https://letsgo.hustlefund.vc/raise-millions Didn’t know about Carta Launch - very cool, Peter Walker. And great post as usual, Kevin.
Great breakdown. One added advice, start with a low cap and if you get momentum your can always raise the cap
How do I make sure I'm safe in the SAFE raising process?
SAFEs are more founder friendly than convertible notes because SAFEs don’t have the debt obligation hanging out there if there is no qualified financing or liquidity event. And the opposite is true if you are on the investor side. I would think the ratio will trend back towards more convertible notes than SAFEs as investor money gets tighter.
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5moKevin Jurovich After going over the concept of SAFE, moreover, I saw this post few months a ago, and I concluded that, in the long run, there are some concerning downsides, in my personal opinion this is a double edge sword that founders should use carefully use ,as with later dilution founders going to realize SAFE "Achilles' heel " 😛 I would not raise capital by SAFE !! must be an equity price round which is much more costly and time taking, but I am sort of protected from dilution screw up down the line What do you say? Any suggestion, or strategy that you may think of to make SAFE not be a poisonous pill? 🤔