Wie können Sie SAFE-Finanzierungsrunden nutzen, um die Finanzierung Ihres Startups zu sichern?

✍️ Hypothetical scenario: 𝐒𝐭𝐚𝐫𝐭𝐮𝐩 𝐀 raises a 100,000 euros 𝐒𝐀𝐅𝐄 with a valuation cap of 1 million euros 💶 and a discount rate of 20%. Hence, if A raises a priced equity financing round with a valuation of 2 million euros, SAFE investors would receive 20% of the post-money valuation, which would be 40,000 euros in equity. As SAFEs offer attractive features for early-stage fundraising, it's key 🔑 to weigh the potential dilution and tax implications before making a decision 🤝🏻.

Raising the first round of investment through a Simple Agreement for Future Equity (SAFE) can be a sensible strategy. The nature of a SAFE allows for flexibility in early-stage financing, particularly when accurately valuing a startup's true potential is challenging. By opting for a SAFE, both the startup and investors can delay the valuation discussion until a later, more informed stage, typically during a subsequent funding round. This approach allows the startup to focus on proving its concept and realizing its full potential before determining a valuation, providing a pragmatic and investor-friendly approach to early financing.

I guess the way I look at a SAFE round (not legally, but as a founder) is that some people are more open to risk and knowns how to mitigate it themselves. They should be rewarded on it, so you want those investors with you. While a full round takes time and paperwork and a lot of negotiation, a SAFE round gives you the ability to move faster, get funded, invest more in the product and reach better milestones for higher evalaution for the actual round (let's say in 6-8 months). A smart investor understands that a good SAFE round will get him more value soon since the milestones are more achievable with funding.

A SAFE, which stands for Simple Agreement for Future Equity, is a type of financing instrument commonly used in early-stage startup funding. It allows startups to raise capital without determining an immediate valuation and without issuing actual equity shares. Instead, investors receive the right to convert their investment into equity at a later financing round, typically when a valuation can be established more accurately or at a valuation cap mentioned in the SAFE terms.

SAFEs are often simpler and faster to execute than traditional financing instruments, such as convertible notes or equity financing. This can make them an attractive option for startups looking to raise capital quickly and with minimal legal fees. SAFEs can also be customized to meet the specific needs of startups and investors, allowing for a high degree of flexibility in terms of conversion triggers and other terms.

SAFE as it is known in US is a simple agreement to issue equity in future. In India, SAFE takes form of convertible note or CCPS. Conversion ratio is linked to valuation of next round - with or without discount.

Though there are mutiple reasons for using SAFE, one of the foremost reason is wherein the financing round is unpriced round, accordingly Investor use this as a preferred instrument so that they can have stocks at future valuation subject to discount.

In my experience advising Professional Investors and Issuers, there are probably only 1 or 2 two circumstances where a SAFE makes sense. One example is where the issuer is waiting to receive a 3rd party approval, such as an early-stage investment company (ESIC) determination from the Australian taxation Office. Investing equity before would render the investment non-eligible (causing investors to forego a tax deduction & capital gains tax relief on later sale). The conditionality of the SAFE can be useful here. The other limited circumstance is where time is of the essence as between serial founders/investors that know each other and can agree on a small discount/no valuation cap. Otherwise, SAFEs are kryptonite to the uninitiated issuer.

A SAFE can be a good way to take in capital before you have a lead Venture Capitalist. You do not have to put a valuation on your company -- that will come later. Try to put the SAFE Cap at a value around where you think you will want your priced valuation to be. And probably use a standard 10-20% discount. With the SAFE you also do not have to negotiate investor rights or board seats.

While SAFE financing can be advantageous for its "flexibility", some investors may prefer traditional equity with defined ownership and control rights. Taking the specific case of 'emerging companies with uncertain future success', SAFE financing could be understood as beneficial; so if the startup fails to reach the expected project's bigger picture, it can avoid the potential overvaluation associated with traditional equity financing.

Navigating SAFE financing for startups requires strategic finesse. Identifying investors aligned with this instrument is the initial step. The pivotal move lies in defining key SAFE terms like the raise amount, valuation cap, and discount rate. Balancing attractiveness for investors with realistic growth expectations is a delicate dance. Founders should recognize the symbiotic nature of these terms—enticing enough to secure support but pragmatic for sustained growth. Crafting a compelling proposition requires a nuanced understanding of investor psychology and startup potential. Ultimately, success hinges on finding equilibrium in terms that resonate with investors and align with the startup's trajectory.

Determine your funding needs and choose the right SAFE type. Work with a qualified lawyer to create a SAFE document that outlines the specific terms of the investment, including: • Amount of investment • Valuation cap (if applicable) • Discount rate (if applicable) • Conversion trigger (e.g., a future equity round or acquisition) • Maturity date (optional) Negotiate the terms of the SAFE agreement. Prepare for conversion - When the conversion trigger event occurs (e.g., a future equity round), work with legal and financial professionals to facilitate the conversion of the SAFE into equity shares. Ensure you have the necessary documentation and processes in place to handle the conversion smoothly.

Having the right combination of terms for a SAFE is important to make the deal attractive to investors. A common way of doing this is having a SAFE with the basic terms outlined that most investor will be okay with, but also having side letters with investors you really want on your cap table. Side letters can cover things like conversion triggers, discount rate, valuation caps, investor rights, governance and board representation, provisions for events like acquisition or IPO, or unique situations like different payment terms or conversion mechanics. This would ideally be for strategic or bigger investors where you negotiate terms specifically for them which are not for everyone.

You get to kick the can down the road on the issue of truly putting a value on your business and that will make you feel better because you won’t immediately feel the impact of dilution you’ve just caused on yourself. (Please note the sarcasm… I don’t like investing in SAFEs)

By not incorrectly pricing a startup, this allows the founders to not bear the risk of dilution upfront and may also provide a risk management mechanism for the investors in that they can receive future stock at presumably a higher valuation should the business grow.

One of the foremost benefit is that documentation is simple, as everyone follows the template being issued by Y combinator and the Investor/company make relevant changes and accordingly they can sign the SAFE

It is a misconception that by doing a SAFE founders avoid pricing the deal. The cap effectively sets the valuation for that tranche, while leaving open the possibility of it going lower in the next priced round. Founders should be careful with accumulating too much SAFE overhang: you may not have internalized your fully diluted cap table yet, but significant dilution has already happened and your cap table may now be extra messy. Additionally, potential future priced round investors may be unhappy about the large amount of spent capital that needs to convert into their deal. Think twice before you open another SAFE.

The most critical risk to consider is that some key investors may not be willing to do a SAFE. Unless your round is in crazy high demand, I’d always keep an open hand about using a SAFE vs taking the time to price the round. Why lose a great lead investor just because they wanted to price the round instead of doing a SAFE?

Alignment of Interests, i feel this is the most critical part when you are building business SAFEs align the interests of investors and founders by deferring the valuation negotiation until a subsequent financing round. This encourages both parties to focus on the startup's growth and success.

SAFE shares only issue upon a qualifying event at the higher of the amount of $$ paid to the company under the SAFE divided by the discount price; or that same amount divided by the SAFE price which = valuation cap/fully diluted share capital of the issuer. Risks to the founders/issuer include excessive equity dilution where the subsequent priced equity round valuation is well above the valuation cap, and/or the pre-agreed discount is too high, and where there are several other SAFEs in existence and convertible notes on issue that sit outside the 'fully diluted share capital' calculation and can create a disincentive for priced equity investors to invest. SAFEs are most risky when used by uninitiated issuers with valuation paralysis.

𝐄𝐱𝐚𝐦𝐩𝐥𝐞: an startup "Z" raising $400,000 💰 through a SAFE with a valuation cap of $10 million. An investor invests $200,000 under this SAFE. When the company secures a future equity round at a valuation of $12 million, the SAFE converts into equity at a discount of 20%. This means the investor receives 100,000 shares, representing a 10% stake in the company. 💡 Since the SAFE allows the investor to participate in the company's growth at a lower valuation, it also exposes them to potential dilution from future fundraising rounds. Moreover, the lack of voting rights may limit their influence on company direction.

As a second option, you may use CNs.: Convertible Notes are financial instruments used to raise capital. In simple terms, they can be considered as a debt established between the startup and the investor. Upon reaching the maturity date, the investor has the option of demanding repayment in cash or converting the debt into shares of the company. This approach is common in the initial stages of financing, as part of seed or pre-seed capital. There are other agreements, such as the stock purchase agreement, stock option agreement, restricted stock agreement, preferred stock agreement, royalty agreements, income commissions or deferred compensation.

It seeks to begin to address a very important topic and that in turn draws the attention of startup founders to the importance of knowing more about the financing processes because sometimes the startup finds funds, but compromises its essence due to lack of specialized advice. Although this entry is focused on Fintech, a topic that I address most frequently on my LinkedIn, it is applicable to any startup. There will be a series of posts dedicated to this topic that you will soon be reading. If you need to ask a question, address a case, ask me to address something you need to know about, don't hesitate to contact me.