Y Combinator's SAFE: A Risky Business for Most Startups
Oh boy, here we go. Buckle up my friends, because it's time to burst the bubbly, delusional enthusiasm surrounding Y Combinator's SAFE agreement.
Look, I get it. YC is a startup wonderland where unicorns frolic and rain money on aspiring founders. But for most startups, especially those outside the YC bubble, the Simple Agreement for Future Equity (SAFE) can be a problematic and downright dangerous path to follow.
Now, don't get me wrong. The folks at Y Combinator are no doubt smart cookies, and their accelerator program has spawned some of the most successful startups of our time. But the SAFE, which they've promoted as a quick, simple, and efficient way to fund early-stage startups, may not be the panacea it's cracked up to be. In fact, for many startups in slower funding markets, it can lead to some serious headaches down the road.
Let's start with the basics. A SAFE agreement is essentially a contract between an investor and a startup that allows the investor to purchase equity in the company at a future date, typically during a priced equity financing round. The idea is that it's a win-win for both parties: startups get their funding faster without having to haggle over pesky details like valuation, while investors get a stake in the company at a potentially lower price. Sounds great, right??
Well, hold on to your hoodies, because here's where things start to get messy.
First off, SAFE agreements can wreak havoc on your cap table. Because they don't have a set valuation or expiration date, they can pile up like dirty laundry, creating a quagmire of uncertainty for both founders and investors. This lack of clarity can make it difficult to raise future rounds, as new investors may be wary of the potential dilution and complexity involved.
Second, the SAFE's simplicity can be a double-edged sword. Sure, it's easy to sign on the dotted line and collect your cash, but this lack of negotiation can leave founders with a raw deal. The terms of a SAFE are often heavily skewed in favor of investors, who can end up with a disproportionate amount of control and equity in the company. In slower funding markets, where startups have fewer options and less leverage, this can be a recipe for disaster.
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Third, the very nature of a SAFE agreement can create perverse incentives for both startups and investors. For founders, the pressure to achieve a high valuation in the next round can lead to unsustainable growth and questionable decision-making. Meanwhile, investors may be tempted to push for an early exit or favourable terms, potentially damaging the long-term prospects of the startup.
So, what's the solution?
Well, it's not rocket science. For most startups, especially those outside the Y Combinator fantasyland, a good old-fashioned priced equity round may be the way to go. Sure, it's more time-consuming and requires some negotiation, but it provides a clear structure and valuation that can help avoid future headaches.
Simply put, Y Combinator's SAFE agreement may work wonders for the chosen few who frolic in the land of unicorns and free-flowing cash, but for the rest of us mere mortals, it's important to tread carefully. The simplicity and speed of a SAFE can be alluring, but it's crucial to consider the long-term consequences and weigh your options carefully. Because, let's be honest, the world of startups is already chaotic and uncertain enough without adding fuel to the fire.
Now, go forth and conquer; change the world. Just remember, if your spidey sense is tingling, talk to a Goodlawyer before you jump into a not-so-SAFE matrimony with your first investors.
Life is good.
Note to readers: I tried to channel my inner Prof Galloway. Thanks for reading. Goodlawyer does most priced equity rounds for under $5k.
Partner, M&A and Capital Markets at Bennett Jones LLP
1 年Interesting perspective as always Brett Colvin. I've worked on many SAFE offerings as well as many financings which triggered SAFE conversions. While SAFEs (despite the name) are not without their complexities, I find they work well provided they are properly drafted (and yes, I don’t think they should simply be taken "off the shelf"). In Canada I regularly see founders use SAFE rounds as a form of bridge financing and in lieu of a convertible note offering. In my experience, founders and investors continue to use SAFEs due their key feature, they kick the question of valuation down the road. Can’t wait to see what the "GoodSAFE" looks like!?
Partner @ Sprout Fund VC ????/ Mentor @ 500 Global
1 年Brett, you know my thoughts on this... Priced Round > SAFE There is a place for SAFEs, usually when a startup will be raising a structured round within months, but this isn't the case for most startups. And from an investor's perspective, I don't think these instruments are investor friendly. In fact, they add risk if a major structured round isn't imminent.
Strategic advisor AI integration, professional speaker on responsible AI, professional ski instructor, pursuer of new opportunities.
1 年SAFE or priced pre-revenue round? I’ve done both, and they each have benefits and drawbacks, many of which you’ve highlighted here Brett. I’ve found the deal structuring far easier with the right partner(s) first. If an Angel doesn’t want a SAFE but it’s the right structure for you? Wrong Angel, politely move on. Founders need to take a hard look at the intangibles that investors either bring or don’t for the right match. Pro tip: Everyone says upfront, “they’re great potential partners because they support founders better than other firms.” There’s lots of ways to test that theory. Negotiations and end deal structure are typically far easier and more fair with the right match. Issues associated with the wrong money are often amplified after the deal is signed in both SAFE’s or priced rounds. Founders need to look past the money and do a gut check on the human being(s) before signing. Never in our history has there been so much money on the street in general. US banks failing and a recession coming our way at the moment notwithstanding. I’m saying the obvious but founders can get tunnel vision and miss things before the ink dries on the SAFE or share certs…in my humble experience anyway.
Chairman & CEO Valhalla Private Capital, Managing Partner Old Kent Road Financial, Partner Peterborough United FC
1 年Well you know how I feel...
Corporate Lawyer at Osler, Hoskin & Harcourt LLP 律师事务所
1 年SAFEs are still a great fit for startups and investors that are on the same page with regards to aiming for hypergrowth along the venture capital alphabet journey (Series Seed, A, B and beyond). For many Canadian startups however, that might not be the path they decide to take, and many successful and profitable companies at home forge ahead with different funding models. Certainly woth consulting your investors and legal advisors as you figure out what makes sense!