The Truth Behind the SAFE Note
By TABS Team Staff Writers | www.tabsscore.com
After Founders take their TABS Score Assessments, most of them take advantage of the tailored Investor recommendations they find at the end of their report and begin to lock in the terms of their fundraising process. One of the most common requests from Startup Founders to our team, once they’ve connected with interested Investors, is whether we have an up-to-date version of a SAFE note, a document created by Y-Combinator, that we can provide to them.
For those of you who aren’t familiar with SAFE (Simple Agreement for Future Equity) notes, they are an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment. The SAFE investor receives the futures shares when a priced round of investment or liquidation event occurs. SAFEs are intended to provide a simpler mechanism for startups to seek initial funding than convertible notes. Here are a few thoughts, curated by Venture Investor Hershel Mehta, that we’d like to share with you about raising via SAFE Notes:
1) SAFE notes are a fast and easy way to raise funds from Angels and VC’s
2) The valuation CAP on a SAFE note is NOT the current value of your company — the point of the SAFE is to defer determining a valuation until your startup has established a viable business/revenue streams and earned a priced round from an incoming investor.
3) Founders raising on SAFE notes for a seed or pre-seed should look to dilute themselves at most 10–20%.
4) There is a BIG difference between pre and post-money. Founders should understand the mechanics of conversions at the priced round.
5) SAFE notes are not treated as debt to the company, and some investors will refuse to invest via a SAFE because they feel they are are not protected enough and the fact there isn’t an automatic conversion date could lead them to never even enter into a CAP Table.
6) Entrepreneurs NEED to understand the conversion mechanics and how it will affect their balance sheet. If they are unsure they need to find someone in their network that will work them through the accounting.
But there is one major factor to consider, which Silicon Hill’s Laywer has perfectly summed up. Recently, Y-Combinator updated its downloadable SAFE note to provide additional clarity in regards to the mechanics.
[But w]hat’s not emphasized prominently enough is that the way they delivered that “clarity” is by implementing anti-dilution protection for SAFE investors (like themselves) that is more aggressive than anything remotely “standard” in the industry; and that wasn’t necessary at all to provide “clarity.” Under YC’s new SAFE, the common stock absorbs all dilution from any subsequent SAFE or convertible note rounds until an equity round, while SAFE holders are fully protected from that dilution. That is crazy. It’s the equivalent of “full ratchet” anti-dilution, which has become almost non-existent in startup finance because of how company unfriendly it is.
It’s important that Founders consult with attorneys that are well versed in venture financing to ensure that the decision to use or not to use the SAFE note is derived with reason.
TABS is engineered by successful serial entrepreneurs and veteran seed investors, the TABS Suite is the first DaaS (Diligence-as-a-Service) platform that provides a comprehensive, holistic, and in-depth qualitative evaluation of an early-stage venture (from Seed to Series A). Founders interact with the TABS machine-learning platform which takes a ‘full-body x-ray” and scores the company by giving value to intangibles encompassing non-balance sheet assets. accompanied by a detailed diagnostic report, an action plan with specific steps comparative analytics, and tailored recommendations. The TABS Suite has been widely adopted as a way for anyone to take a look under the hood of a growing venture in a fraction of the time and cost the process currently takes. To learn more, visit www.tabsscore.com or email us at firstname.lastname@example.org.