An Easier Way to Raise Early Stage Funding

One of the most common questions we receive is around fundraising for a new company. The options are driven in large part by type of company. A small professional services company may never need to raise outside capital. A more capital intensive company like a retail store or food cart may need to raise money via family members or an SBA loan. Early stage companies with a more scalable business model or expansion plans often look to raise venture capital. One of the more innovative approaches in that context is the SAFE note.

The Y Combinator incubator “invented” the SAFE note in 2013. The goal was to dramatically streamline (and hopefully standardize) early stage fundraising. Since then, SAFE notes have caught on and become widely used.

SAFE stands for “Simple Agreement for Future Equity” and is a replacement for what are typically called convertible notes. In basic terms, a convertible note is a loan made to an early stage company that converts (turns into) equity when the company raises its first equity round. As a very simple example, if a company raised an equity round based a $1M valuation at a $1 per share price, a $10K convertible note would convert (become) 10,000 shares in the company. Admittedly, this over simplifies things in that a convertible note will typically have other bells and whistles that come with, such as accumulating interest on the loan amount.

The nice thing about this approach is that an early stage investor can invest without going through the brain damage of trying to reach agreement on the current valuation of the company. The earlier the company, the more the valuation process is art versus science and it can be very difficult to land on a number.

So, a SAFE note takes the convertible note concept and makes it more founder friendly. Here are the key aspects:

1. Conversion: Upon the occurrence of the triggering event, the investor's investment converts into equity shares in the company at a predetermined valuation cap or a discount to the price of the subsequent equity round

2. No interest or maturity: Unlike convertible notes, SAFE notes do not accrue interest, and they do not have a maturity date. This simplifies the terms and avoids the need for repayment if the triggering event doesn't occur.

3. Not debt: SAFE notes are not debt instruments, so they do not represent a loan that the company needs to repay. They are considered equity-like instruments, providing investors with the potential for future ownership in the company.

4. Limited rights: SAFE notes typically do not include voting rights or other rights associated with traditional equity shares. They are more focused on the future conversion of the investment into equity.

There is more variation and nuance than the higher level description above, but those are the basics. Here’s a

link to the Y Combinator website with more information and actual docs. Let us know if we can help in this process.