Key Insights for Founders on Safes

In Silicon Valley, SAFEs are the norm for early-stage capital raises. In Birmingham, AL, that is definitely not the case. We recently completed a pre-seed fundraising via SAFE and, as an ecosystem, I think we need to be better educated as founders and investors on why this is a useful instrument. Below are a few key insights on what SAFEs are, when to use them, and what the benefits are: 1/ What is a SAFE? - SAFE stands for Simple Agreement for Future Equity. - As the name implies, this gives investors a RIGHT to equity in the FUTURE, but they are not technically equity holders today. - Why future? Because to sell equity in your business, you have to value your company. However, for early-stage companies, it's very difficult to know what your company is worth. - SAFEs allow you to punt the valuation question to when it makes sense. They convert to equity at a future "trigger event," typically a larger fundraising round or exit. 2/ Who do SAFEs make sense for? - For pre-seed or early-stage rounds when valuation can be tricky to nail down. - For early-stage software companies, as opposed to cash-flowing services businesses where a financial valuation may be more feasible. - For founders raising funds in increments rather than raising all at once. - For founders who want a quick, affordable way to bring in capital without complex fundraising or costly legal docs. 3/ What are the terms? What is being agreed to, if not equity? - SAFEs often include a valuation cap or discount rate. - A valuation cap ensures investors pay no more than this cap if a later round values the company higher (e.g., $10M cap, $20M round; SAFE investors convert at $10M). - A discount (often 20%) protects investor downside by giving them a price reduction at a future raise. Their ultimate valuation will often be either the cap or the discounted valuation—whichever is better. - Unlike a loan, SAFEs have no maturity date or interest, making them less cumbersome for founders. Bottom-line: as a founder or investor in early-stage companies, it's important to have a basic understanding of SAFEs and the benefits they offer - especially in a growing startup ecosystem like Birmingham. SAFEs provide a straightforward path to capital that allows founders to focus on what's important at their stage (i.e. building) without the friction of traditional fundraising.

FOUNDERS: don't allow angel investors writing small checks to set high valuation caps on your SAFE notes. Many times an angel, perhaps someone who isn't that sophisticated, will offer you a high valuation cap as a way to entice them to take their capital. On its face, a high valuation cap is good for you, because it implies minimal dilution if the SAFE converts at that cap. For example, a $20k SAFE investment at a $50m cap = .04% dilution. Great, right? Not really, because now you have a SAFE with a $50m cap hanging out. You will need to disclose prior SAFE terms to prospective VCs, and if you tell a VC your last investment was done at a $50m cap, it might dissuade them from investing. Why? The VC might be willing to invest at a $10m cap, and think that the lower cap will offend you. They might not feel like it's worth the brain damage to create a "perceived" down round so early in the company's life cycle. Instead, YOU should set the terms of your SAFE. If you want to raise a $1m pre-seed round, budget for 10% dilution, which equals a $10m post-money valuation cap. Even though the valuation cap is a MAXIMUM valuation, and NOT an ACTUAL valuation, humans get anchored to numbers and often times the valuation cap becomes a kind of proxy valuation that affects investor behavior. So set your valuation cap appropriately, don't set it too high (or too low of course). Set it just right.

“Davidson, should I raise on a SAFE or wait until I can price my round?” I get this question quite a lot. There’s so much information out there about SAFEs that I sometimes assume everyone understands how they work. But like most things in startup land, the devil is in the details — specifically in the valuation cap and the discount rate. Let’s break it down. The SAFE (Simple Agreement for Future Equity) was created by Y Combinator in 2013 to make fundraising simpler and faster. No valuation negotiation. No complex terms. Just a promise: “When I raise properly, you’ll get shares.” It looks simple. But simple can get complicated. Here's the usual pattern: ✅ SAFEs help you raise quickly without legal drama. ❌ But stack too many SAFEs — especially uncapped ones — and you’ll dilute more than you realize. Let’s say you’re building a healthtech platform called MediQuick. You’ve got: A great founding team A working prototype No revenue yet An angel investor offers you $100K through a SAFE. How should you proceed? You need to understand 2 key levers: 1. Valuation Cap Think of this as the maximum price at which their $100K will convert into shares. If your next round is at a $10M valuation, but the SAFE cap is $5M — the investor gets shares as if your startup were worth $5M. More equity for them. Why? Early belief = early reward. 2. Discount Rate Maybe you didn’t set a cap but offered a 20% discount. That means when you raise your priced round, the SAFE investor gets shares at 80% of the price. Again: early belief = better deal. Some SAFEs have both. Some have one. Some have neither (which is a red flag 🙃). But if you stack too many SAFEs without understanding the math, you could end up over-diluting yourself before you even know it. I’ve seen founders shocked at how much equity they gave away by mixing multiple uncapped SAFEs. So… should you use a SAFE? Yes — but only if you understand it. Risks to watch for: Cap table opacity: Many founders don’t model out how multiple SAFEs will convert. The result? Surprise dilution. Investor-friendly terms: Unless you understand caps, discounts, and MFN clauses, you might give too much away. Down round impact: If SAFEs convert at generous terms, and your priced round comes in low, founders take the hit. In Africa and other emerging markets, SAFEs are gaining traction. But founders must localize their understanding — legal systems differ, and not all SAFE templates are created equal. SAFEs let you raise before your valuation is clear. But they’re not free passes. They’re promises. Stack too many — especially uncapped or overly generous ones — and your cap table could be a mess. My advice to founders: Always model the SAFE math into your cap table. Avoid stacking uncapped SAFEs — use caps or discounts strategically. Know when to stop: A priced round brings discipline. Ultimately, a SAFE should be what it says on the tin: Simple. And fair. Try to keep it that way.

Founders - you must be familiar with SAFEs (Simple Agreement for Future Equity) if you're raising early stage money for your startup, period. Why? Because this instrument has come to dominate rounds for nascent companies, even those that raise $4 million or so. 𝗕𝗮𝘀𝗶𝗰𝘀 • With a SAFE, investors give the founders money upfront for the promise of future equity. That future equity arrives with a "qualified financing", usually a priced round.    • SAFEs come in two flavors: pre-money and post-money. The post-money type is much more common (80%+).    • SAFEs have two "conversion terms": valuation caps and discounts. 90% of SAFEs have a valuation cap, about ~33% have a discount. Terms can be used together or separately.    • SAFEs 𝗮𝗿𝗲 𝗻𝗼𝘁 𝗳𝗿𝗲𝗲. They come with implied dilution that the founder needs to track closely, especially since post-money SAFEs give the investor the added benefit of anti-dilution if the founder raises multiple SAFE rounds. 𝗖𝘂𝗿𝗿𝗲𝗻𝘁 𝗠𝗮𝗿𝗸𝗲𝘁 • 85% of angel rounds happen on SAFEs. The rest is convertible notes (like SAFEs, but with an interest rate) and some priced activity.    • More than half of all rounds under $3M raised are on SAFEs.    • A quarter of seed rounds with $5M+ raised happen on SAFEs. 𝗣𝗿𝗼𝘀 • Speed. Signing SAFEs is quick and easy. • Cost. Typically a much lower legal cost than a priced round. • Valuation delayed. No need to decide on an exact valuation for a super early company that may not have product, etc. 𝗖𝗼𝗻𝘀 • Risk of overdilution to founders if multiple SAFE rounds are raised. • Risk (to investors) of never actually owning shares should a priced round never happen. • Risk (to investors) of lack of rights around equity (things that may have been present in a priced round like information rights, pro rata, etc). Fundraise safely! #startups #founders #VC #fundraising #SAFE

I came across a post warning how SAFEs can quietly wreck your company if you don’t control them. Let’s unpack it. The SAFE you signed might cost you your company. Founders love SAFEs: - No legal fees - No messy valuation fights - Fast cash But that simplicity hides a real danger: compounding dilution. Here’s a simple breakdown: - You raise $500K on a SAFE: → $5M valuation cap → 20% discount → No pro-rata limit - Six months later, you raise another $1M on a SAFE: → $6M valuation cap → 20% discount You’ve now raised $1.5M total — but technically, you still own 100%. Because SAFEs convert later. Fast-forward to Series A: A VC offers $3M at a $12M post-money valuation. Normally, that would mean 25% of your company (3M/12M). But first…the SAFEs convert. Here’s the impact: - The $500K SAFE converts at $5M → 10% ownership - The $1M SAFE converts at $6M → 16.67% ownership Before Series A even closes, you’ve lost 26.67%. Then the VC takes 25%. You’re left with ~48% ownership — and that’s without ESOP or co-founder splits. All from $1.5M of “easy money.” How to protect yourself: - Simulate your next rounds before signing (always and before any round closing) - Cap SAFE dilution (aim for 15% or less) - Set pro-rata limits - Avoid stacking multiple SAFEs - Treat the cap like a valuation — because it is Fast cash today. You could loose everything down the road. NUK! #Startups #VC #Fundraising #SAFE #CapTable #Dilution #FounderTips #StartupFinance

Mastering the SAFE note 🔥💸 In early-stage fundraising, SAFEs are now the go-to, with 89% of pre-seed money raised via SAFEs over convertible notes in Q4 2023. If you're a founder, it’s time to get familiar – here’s what you need to know to make SAFEs work for you. 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 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...you are amazing. 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. ✌️

Should you raise via a SAFE or a priced round if it is over $5M? Peter Walker shares the best startup data and insights out there. Check out this info from him in regards to the use of SAFEs for startup fundraising. ————— SAFEs used to be reserved for small angel and pre-seed rounds. If you were raising $500k or less it made perfect sense. Today, however, SAFEs are taking share from the traditional priced round across many round sizes. In 2024 more than half of rounds that raised $2M-$2.9M happened on SAFEs - and nearly 25% of rounds over $5M were through SAFEs. This isn’t too surprising, given the two major advantages of the SAFE are closing speed and low cost — and both are in high demand these days. But it does introduce some complications: 💡Most SAFEs have valuation caps but those are not quite the same as valuations - and they could introduce hurdles for the future first priced round if they are set too high. 💡Multiple rounds on post-money SAFEs come with anti-dilution built into the financing - great for investors, not so much for founders. 💡Rounds on SAFEs are typically not treated as markups in the valuation policy of most funds. This means that companies could be growing and raising and yet the mark for the original investors seems “stale”. ————— Peter mentions that he is generally pro-SAFE, but the idea of raising a $5M or even $10M round on them makes him slightly uneasy. He notes that the chart below may be a reflection of priced equity rounds becoming more and more expensive to close. Shouldn’t there be an inexpensive, quick, and easy way to raise a priced round? How about a standardized Series A template doc that VCs, founders and their attorneys are all good with, where there is just a Schedule A that outlines the specific terms that need to be negotiated.

"We gave pro rata rights to every seed investor—and it jeopardized our Series A." They raised $3M on a $10M post-money SAFE, and gave pro rata rights via YC’s standard side letter to every investor who asked. At the time, it felt harmless—there wasn’t exactly a line of investors begging to get in. But when they went to raise a $10M Series A at a $40M pre, it became a real problem. The SAFE investors would own 30% of the company post-conversion, prior to the Series A—and they had the right to take 30% of the new round = $3M. That left just $7M available for new investors. The lead VC wanted 15–20% post-money ownership, which means: 15% of $50M post = $7.5M 20% = $10M So $7M wasn’t enough—even for the minimum. There was no room for strategic angels or insiders the lead wanted to syndicate in. No flexibility to expand the round without serious dilution. And the founders were already on track to lose majority ownership before Series B. We were stuck negotiating with a dozen early investors to waive their pro rata rights—and the biggest seed investor refused, citing fiduciary duties to their LPs. It slowed down and jeopardized the entire Series A deal. Pro tips for founders: 1. Run your dilution math every time you raise on SAFEs, especially with varying valuation caps. 2. Be strategic about granting pro rata rights—consider limiting them to your seed lead. 3. Want to make sure you're ready for a SAFE financing? Comment "SAFE" and I’ll send you my free SAFE financing checklist.

Stacking SAFEs is already common—and it’s about to become more so.   Of companies that raised on a SAFE in the past year, half issued them at multiple valuation caps: 🔹 25% issued 2 SAFEs 🔹 12% issued 3 🔹 11% issued 4 or more   Founders usually turn to SAFEs when round sizes are too small to justify the legal cost of a priced round. In some cases, they also want to keep early investors on common terms and avoid the governance rights tied to preferred equity—though firms often negotiate side letters to work around this.   There are a few common reasons founders stack SAFEs: 🔴 Bridge capital – They might need another $250–500K to hit a milestone 🟡 Sequential small rounds – A pre-seed SAFE, followed by a small seed SAFE 🟢 Managing excess demand – Founders may raise at higher caps to reduce dilution, even within the same round   The end result: while SAFEs *feel* simple, raising on post-money caps means dilution adds up.   (On the bright side, at least they’re simpler to calculate than convertible notes!)   I think we’re seeing more of scenario #1 and #3 above. According to Carta, sub-$250K rounds are gaining share (up 50% over the past two years), eating into the $1M+ deals. Those could easily be bridges or tack-on's, at different valuations from prior rounds... and I think they continue. Like much else, it’s a barbelling effect.   Pre-seed investors: what patterns are you seeing in the market?

SAFEs have truly reduced funding friction. What is a SAFE? Popularized by YC, it is a funding instrument typically used for early-stage startups. SAFE = Simple Agreement for Future Equity Early-stage companies are inherently hard to value, and the SAFE has allowed that decision to be saved for the future. That said, the cap is inherently a valuation ceiling, so in some sense, it is a valuation. Regardless, it is popular because it is fast, cheap, and easy to fundraise on a rolling basis with a SAFE, but founders need to be careful that they don't raise too much or use too many of them. The reason is that the YC SAFE has an “anti-dilution” provision that protects investors from dilution by automatically adjusting their equity ownership if the company later issues shares at a lower valuation than the valuation at which the SAFE was issued. This only occurs in the first priced round, where the SAFE(s) convert into equity. For example, suppose an investor signs a SAFE with Company X at a $10 million valuation cap, meaning that when the SAFE converts to equity, the price per share will be calculated based on a maximum valuation of $10 million. Now, let’s say Company X later needs to raise additional capital and issues shares in a new round with a valuation cap of $8 million. Without an anti-dilution provision, the SAFE investor would be diluted, as new investors are paying less per share than initially agreed upon in the SAFE. With the anti-dilution provision, however, the investor’s SAFE can adjust to the new $8 million cap, effectively increasing the SAFE holder’s ownership percentage when their SAFE converts into equity to account for this lower valuation. The anti-dilution provision safeguards the original investor’s stake, aligning it with any subsequent round’s lower valuation and providing additional protection in “down rounds” (when a company’s valuation decreases). Alright, so back to the Founders… SAFEs are great but know that they are structured to be very investor-friendly and preserve investor ownership. If you raise a lot of money on them, you may be open to higher dilution, which will stack at the time of the next priced round. Moreover, each SAFE stacks dilution, and they individually carve out ownership. The chart below from Peter Walker at Carta illustrates the point: larger rounds tend to lead to higher dilution. So, the net-net is to use a SAFE but be sparing in usage as it can be highly dilutive. Moreover, the counter-intuitive thing is that Founders have far more leverage on terms in a priced round as SAFEs are relatively set. Be SAFE out there!