How can you use a SAFE note to raise capital from angel investors?

A SAFE (Simple Agreement for Future Equity) note is a type of convertible security. It's a way to change into equity shares in your company later. Unlike loans with interest and a due date, a SAFE note isn't about debt. It doesn't involve interest or repayment. Instead, it acts as an agreement. It gives the investor the right to get a certain amount of equity in your company when a future funding round happens. This is based on an agreed-upon valuation cap or discount rate, or sometimes both.

Unlike convertible notes, SAFE notes don't carry interest or maturity date, alleviating financial pressure. However, it's crucial to carefully set terms, including valuation cap and discount rate, to protect both parties. Leverage legal expertise to craft a comprehensive agreement ensuring a fair and transparent conversion process during future funding rounds. The flexibility of SAFE notes makes them a valuable tool in attracting investors while preserving financial agility.

We have used SAFEs in a multitude of early-stage venture deals we have invested into and find it to be a universally accepted and efficient way for companies to raise capital. Thanks to Y Combinator for introducing this simple agreement, pun intended and making founder's early-stage corporate lives that much easier.

> Highlight your startup's potential, market opportunity, and traction. > Explain how the SAFE note funding will fuel your growth. > Attend industry events, online forums, and connect with relevant VCs who invest in early-stage startups. > Agree on a maximum valuation at which the SAFE note converts to equity, protecting investors from downside risk. > Negotiate a percentage discount on the price per share compared to a future priced funding round, rewarding early investors.

A SAFE note, short for "Simple Agreement for Future Equity," is a type of convertible security used by early-stage startups to raise capital without a formal valuation. It grants investors the right to convert their investment into equity shares at a later date. SAFEs are most suitable for pre-seed and seed-stage startups with limited traction and no established valuation. They offer a quick and efficient way to access capital from angel investors and advisors looking for early-stage exposure. Alternatives to SAFE notes: # Convertible notes: Similar to SAFEs, but accrue interest and have maturity dates. # Equity round: Issuing actual shares, but requires a formal valuation and is more expensive

Le problème du SAFE c’est qu’il crée un biais et une promesse qui pour beaucoup d’entreprises ne sera pas délivrer : faire une levée supplémentaire (voir plusieurs : Seed, series A, B…). Le SAFE décale la définition de valorisation et du prix des actions au prochain tour. Mais quelle est la probabilité pour faire le prochain tour ? Qui sera fait par des VCs et non plus par des BAs (amateurs). Les entrepreneurs qui passent par un SAFE dépensent trop d’argent et ne vont pas chercher à développer une activité rentable car ils espèrent repasser au ??stand?? pour refaire le plein et changer les pneus, donc montrer une grosse croissance pour le prochain roadshow. Un SAFE c’est un pari (impossible ?) pour faire un nouveau tour d’investissement.

For startups, the agility in capital acquisition without immediate valuation concerns streamlines the fundraising process. Flexibility in equity structure, especially delaying dilution until a priced round, empowers founders. Investors appreciate the lower risk and potential for enhanced returns with discounted prices or capped valuations during conversion. The simplicity of SAFE notes reduces legal complexities, making it an efficient and standardized choice. Strategic utilization of SAFE notes can foster a win-win scenario for both parties.

SAFE notes are simpler and more straightforward than traditional equity or debt financing, which can also mean lower legal costs and faster closing times. They can also minimize equity dilution for founders, allowing them to retain more control over their company in the early stages.

SAFE notes are straightforward and emerged out of YC team to i guess : 1. allow to solve the issue of valuation of early stage startups. If you try to do that with equity it’s complex and also need to set in stone a value for something too early to know 2. To allow the initial bet to not set a value in stone, debt makes sense, it also allows for flexibility up to the cap value 3. a friend of mine said discounts are dumb :) i tend to agree / keep it simple 4. keep in mind a SAFE really is useful if you re going the VC way. If you re post launch with a product eg a SAAS then something like revenue based VC makes more sense 5. SAFE is now a standard for angels / investor, as long as your corp is US based

Uncertain Ownership: For founders, SAFE notes can lead to ownership dilution. The exact amount of equity given up isn't clear until later funding rounds. Valuation Challenges: Investors face risks if the startup's valuation at the time of equity conversion is lower than expected. This can lead to less equity than anticipated. Limited Rights: SAFE holders usually don't have the same rights as traditional shareholders, like voting rights, until conversion. Overuse Risks: Relying heavily on SAFEs can complicate future financing rounds, as each SAFE might have different terms. No Immediate Return: Unlike debt instruments, SAFE notes don't accrue interest or guarantee a return, making them riskier for investors.

SAFE notes delay the company's valuation to a future equity round, which can result in less favorable terms for founders if the company's valuation doesn't increase as expected (which, in our current climate, is likely). They can also create complex cap tables and can be confusing for investors and founders, especially regarding future equity ownership percentages.

Despite the benefits, there are some potential downsides to using SAFE notes. For startups, they bring uncertainty and complexity to the capitalization table. The exact number of shares to issue remains unknown until a priced round happens. Additionally, SAFE notes might limit future options and flexibility. Startups need to follow the agreement's terms before securing more capital or exiting the company. Investors face increased risk and uncertainty compared to direct equity investment. Until conversion, they lack ownership and voting rights. This could potentially result in a lower return or higher dilution if the subsequent round values the company above the cap or discount rate.

Startups may face cap table complexities and uncertainty, as share issuance hinges on a future priced round. Committing to SAFE terms limits future strategic choices, adding a layer of inflexibility. Investors, without immediate ownership or voting rights, assume higher risk and face uncertainty until conversion. Additionally, unexpected outcomes may arise if a subsequent funding round surpasses the agreed-upon cap or discount rate, potentially impacting returns and dilution levels. A balanced approach is crucial, weighing benefits against these considerations for optimal funding decisions.

While Simple Agreements for Future Equity (SAFE) notes offer several advantages, they also come with certain drawbacks and considerations. Entrepreneurs and investors should be aware of these potential drawbacks: 1. Dilution Concerns 2. Uncertain Valuation at Conversion 3. No Voting Rights Until Conversion 4. Potential Complexity in Later Funding Rounds 5. Lack of Interest Payments 6. Investor Risk 7. Limited Investor Protections 8. Tax Implications 9. Potential Legal Complexity 10. Market Acceptance It's crucial for both entrepreneurs and investors to carefully evaluate the terms of a SAFE note and consider their individual circumstances, risk tolerance, and long-term goals before entering into such agreements.

The valuation cap sets the maximum conversion valuation, offering clarity amid market fluctuations. Negotiate a discount rate, determining the discounted share price for SAFE holders during conversion. Pro rata rights empower SAFE holders to maintain ownership by participating in future funding rounds. The most favored nation clause ensures equitable terms among SAFE holders in a round. Striking a balance in these negotiations is pivotal, aligning interests and expectations to achieve a mutually beneficial agreement with investors.

Key terms to negotiate include the valuation cap and the discount rate. Seeking professional advice, especially from an experienced attorney, is important when negotiating these terms . # Valuation cap: Sets the maximum valuation at which the SAFE converts to equity, protecting founders from over-dilution. # Discount rate: Offers investors a discount on the price per share compared to future rounds. # Liquidation preference: Determines investor payout order in case of a startups sale or liquidation. Multiple liquidation events: Defines how conversion happens and investor rights at subsequent funding rounds.

Negotiating the key terms of a Simple Agreement for Future Equity (SAFE) note is an important step in securing funding for your startup. Here are some steps and considerations for negotiating the key terms of a SAFE note: 1. Understand Your Company's Position 2. Research Market Standards 3. Identify Key Terms 4. Valuation Cap 5. Discount Rate 6. Conversion Trigger 7. Negotiate Investor Protections 8. Term Length 9. Communication and Transparency 10. Consider the Investor's Perspective 11. Seek Legal Advice: 12. Negotiate in Good Faith 13. Document the Agreement: Remember that each negotiation is unique, and the terms should reflect the specific circumstances of your company and the investor.

During negotiations, explain the key terms of the SAFE note, addressing concerns transparently. Upon agreement, keep investors engaged through regular updates on your startup's progress. When ready, transition to a priced funding round. Ensure a seamless conversion of SAFE notes into equity, adhering to agreed-upon terms. This comprehensive approach enhances investor confidence and contributes to successful fundraising.

SAFE note is when an investor provides capital to a startup in exchange for the right to receive equity in the company at a future financing round or a predetermined milestone. A pre-seed startup raising $100,000 with a 15% discount SAFE and $5 million valuation cap. The investor receives a digital SAFE note representing their investment. A seed-stage startup raising $500,000 with a valuation cap SAFE and no discount. The investor receives SAFE shares convertible at the price per share in the next funding round.

Using a Simple Agreement for Future Equity (SAFE) note to raise capital from angel investors can be an effective and streamlined approach for early-stage startups. Here's a step-by-step guide on how to use a SAFE note to attract investment from angel investors: 1. Understand Your Funding Needs 2. Create a Compelling Pitch 3. Identify Potential Angel Investors 4. Educate Investors on SAFE Notes 5. Determine Valuation Cap and Discount Rate 6. Prepare Investor Materials 7. Initiate Conversations 8. Present Your Pitch 9. Discuss Terms and Address Questions 10. Negotiate Terms Collaboratively 11. Secure Commitments and Document Agreements: 12. Provide Regular Updates 13. Prepare for Future Funding Rounds

Using a SAFE note is much more accepted in the United States as compared to Europe. On the American side, If I understand correctly, there are many more investors interested in the top-tier deals when compared to Europe where the landscape is much more fragmented and on a country-by-country basis. In addition, European Investors tend to focus much more on the downside than American investors who are more focused on the upside of a potential investment. This is why in Europe a Convertible Loan agreement seems to be much more prevalent as it is more "investor-friendly"

Utilizing a safe note to secure capital from angel investors involves presenting a compelling case for your startup's potential. Craft a concise yet comprehensive pitch, highlighting key aspects such as the market opportunity, your team's expertise, and any existing traction. Clearly outline the terms of the safe note, including the valuation cap and discount rate, in your pitch. Emphasize transparency, showcasing both the opportunities and risks associated with your venture. Leverage networking opportunities to connect with potential investors, and create a visually appealing pitch deck that covers essential business aspects.