Deep Dive: SAFEs vs. Priced Rounds – What Founders Need to Know About Fundraising Options

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Founders, Let's Talk SAFEs: The Smart Way to Raise Your First Capital 🚀

If you're gearing up for your first significant fundraising, understanding your options is crucial. One popular choice? SAFEs, or Simple Agreements for Future Equity. Though only a decade old, SAFEs have quickly become the go-to instrument for young startups eyeing their initial outside capital.

🔍 What's a SAFE?

A SAFE is a convertible instrument that converts into equity during your next priced round. This simplifies the fundraising process significantly by eliminating the need to set a company valuation upfront.

🆚 SAFEs vs. Priced Rounds: Key Differences

SAFEs
- No need to determine company valuation upfront
- Faster and cheaper than priced rounds - less negotiation and legal fees
- Valuation cap and / or conversion discount terms protect investors
- Convert to equity at the next priced round automatically
- Flexibility between Seed and Series A financing
- No set maturity date or interest like convertible notes
- Investor shares are diluted if overused in seed rounds

Priced Rounds
- Require determining valuation to set share price
- More structured process but higher legal/negotiation costs
- Investors know the exact equity percentage they will receive
- Seen as a more credible signal for follow-on investors
- No automatic conversion so the investor holds shares indefinitely
- Dilution risk still exists but is more predictable

📈 The Growing Popularity of SAFEs

In the first half of 2024, a staggering 83% of all pre-seed investments on platforms like Carta were executed via SAFEs. This trend is only expected to rise, emphasizing the growing preference for this flexible, founder-friendly approach.

💡 Why Consider a SAFE?

For founders, SAFEs reduce the immediate financial burden and administrative overhead, allowing you to focus more on growth and less on extensive funding negotiations. However, be mindful of potential overuse, as it can lead to significant dilution in later rounds.

As you navigate your fundraising journey, consider if a SAFE aligns with your startup's needs and growth trajectory. It's not just about raising funds; it's about setting your venture on a path to success with the right partners and terms.

A Strategic Move with a SAFE Investment as a VC

Early in my venture capital career, I encountered a promising tech startup that was still flying under the radar. They hadn't yet attracted a lead investor to price their round, a situation that often makes potential investors hesitant. Despite this, the team's innovative approach and the scalability of their solution convinced me of their potential.

Recognizing the opportunity to get involved early, I decided to utilize a SAFE agreement. This tool allowed us to bypass the immediate need for a lead investor and provided the startup with the crucial funds it needed to progress without fixing a valuation prematurely. It was a capped SAFE with a discount.

The decision paid off quicker than expected. Within a year, the startup secured a prominent lead investor for their Series A, and the valuation far exceeded our initial projections. The SAFE converted at favorable terms, significantly boosting the value of our initial investment.

This experience reinforced a valuable lesson: investing is not just about following where others lead but also about recognizing and acting on potential as early as possible. The use of a SAFE was instrumental in this case, providing a flexible, timely, and effective investment vehicle that aligned perfectly with both our strategy and the startup's needs. It was also very easy and way cheaper then leading a round and drafting up the documents for all investors.

Steps to Secure a SAFE Agreement Through Y Combinator

If you’re considering using a SAFE (Simple Agreement for Future Equity) for your startup’s fundraising efforts, Y Combinator provides accessible resources to get started. Here’s a step-by-step guide to securing a SAFE from YC:

1. Visit the Y Combinator Website: Start by navigating to the Y Combinator website where they have dedicated sections for startup tools and documents. YC has made their SAFE documents publicly available, aiming to standardize early-stage fundraising.

2. Choose the Right SAFE Version: YC offers several versions of SAFE documents, tailored to different funding scenarios. Select the version that best suits your fundraising needs:

   • Valuation Cap, no Discount

   • Discount, no Valuation Cap

   • Valuation Cap and Discount

   • MFN (Most Favored Nation), no Valuation Cap or Discount

3. Download the Template: Download the appropriate SAFE template directly from YC’s website. These templates are designed to be fillable PDFs, making it easy to customize them for your specific needs.

4. Review and Customize: Carefully review the document to ensure it aligns with your negotiation and the terms agreed upon with your investors. It’s highly recommended to consult with a legal advisor to tailor the SAFE to your company’s specific situation and to ensure all legal bases are covered.

5. Execute the Agreement: Once the SAFE is tailored to your startup’s needs and reviewed by legal counsel, execute the agreement with your investors. Both parties should sign the SAFE, with each keeping a copy for their records.

6. Follow Up: After the SAFE is executed, maintain communication with your investors. Keep them informed about the company’s progress and any upcoming funding rounds where the SAFE might convert into equity.

Resources

If you want to learn more about Angel Investing read this post where I dive into my journey of how I was able to begin investing in start-ups!

I also shared my experience of investing early in companies and how sometimes the reward outweighs the risk.

📈 Start-Up Investment Opportunities

Please keep this confidential. If you are an accredited investor and interested in expanding your start-up portfolio, we have provided some investment opportunities that are currently active through the Red Beard Ventures Syndicate. The minimum amount to invest per deal is $1k! Please reach out if you have any questions.

Meso: AI-Driven Marketing Platform Transforming Social Media Engagement

• Meso is building a comprehensive AI-driven platform that empowers marketers with real-time insights, automated workflows, and data-driven decision-making tools to navigate the complex landscape of digital marketing.

• $148,000 in revenue to date, projecting $85K MRR by December 2024, and in negotiations for $5M+ ARR deals across major enterprises in entertainment, pharmaceutical, and QSR industries.

• Backed by Keith Barr (Board Director of Yum! Brands, former CEO of IHG Hotels and Resorts), Michael Perlman (VP, Starwood Capital), and Nikhil Saraf (CTO, Struck Capital). 

• Meso's first product, Larry, acts as a proactive digital coworker for marketers, offering context-aware AI agents and auxiliary workflow automation.

• Link to invest

Matternet: Drone Delivery with Impressive Traction & Only Company with FAA Type Certification

• A16z, Sony, and Mercedes-backed Matternet is revolutionizing the instant delivery market by enabling ultra-fast, sustainable, and affordable delivery solutions for e-commerce, food, and medical items. 

• With an impressive 50k flights across 10 cities globally, Matternat is the first and only company to receive full FAA Type and Production Certification for its drone delivery system. Has also secured 135 strategic partnerships including UPS.

• Link to invest 

Monoquant: Revolutionizing Quantitative Trading for Crypto

• Monoquant is developing an AI-powered platform that democratizes quantitative trading in the $2.1T cryptocurrency market, allowing investors at all levels to create, backtest, and deploy automated trading strategies.

• Impressive data moat covering 60% of DeFi and 70% of CeFi markets, with over 4 trillion data points.

• Secured broker agreements with major exchanges (OKX, Binance, Crypto.com, Bybit, MEXC) spanning ~85% of CEX volume.

• Backed by Cherry Street Digital Assets Fund and Alumni Ventures.

• Raising a pre-seed round at an attractive $20M post-money valuation cap with SAFE + token warrant. $MONQ token with 15% unlock at TGE, 3-month cliff, 12-month linear vesting.

• Link to invest

BrandGuard: Safety rails for AI-generated content

• This brand governance platform is able to ensure an AI agent will never generate embarrassing or inaccurate content on behalf of the brand

• In pilot programs with Amazon, Meta, ThermoFischer, Colgate, Little Caesars, and more

• Backers include Bee partners, Frfly, Argon, Relay Ventures, and Baselayer Ventures

• Link to invest

Antaris: The Red Hat for Satellite Missions | Revolutionizing Satellite Design, Simulation, and Operation

• Lockheed Martin and Streamlined Ventures backed Antaris Space is the first advanced platform for Designing, Simulating, and Operating satellites, reducing lifecycle costs by 10x and cutting time to orbit in half.

• Launched first demonstration satellite, Janus-1, in February 2023, built in just 10 months with 75% cost savings over comparable missions.

• Projecting $15.8M TCV Bookings this year with customers including Almagest, Spectral, ST Engineering, and government contracts.

• Strong financial projections: $9M in contracted ARR EO24 → $25M ARR EO25 → $50M ARR EO26, with recognized revenue of $5M EO24 → $10M EO25 → $20M EO26.

• Led by an experienced team: Co-founders Tom Barton (CEO) and Karthik Govindhasamy (CTO and President) previously served as CTO and COO of Planet Labs ($600M raised).

• Link to invest

👋 That’s all for now friends! See you next week.

Next week I am going to dive into syndicate and fund returns and why sometimes it is important to take the risk because the reward can be far greater!

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Disclaimer: The Cap Table DOES NOT provide financial advice. All content is for informational purposes only. The Cal Table is not a registered investment, legal, or tax advisor or a broker/dealer.