When to use a SAFE versus a priced round

Authored by Bryan Springmeyer Bryan Springmeyer is a California corporate attorney who represents startup companies. The information on this page should not be construed as legal advice.

 

The SAFE has become the de facto pre-equity investment instrument. I still work on convertible note financings, but that's usually driven by investor preference - and most often because the investors want a maturity date (repayment timeline) if the company doesn't proceed with an equity financing.

Plenty of clients of mine now raise millions of dollars on SAFEs. However, a common question at any stage is when it's appropriate to use SAFEs, and when it's appropriate to move to an equity financing.

One of the most common considerations for SAFEs versus a priced equity round is total amount raised. Usually around the $1 million mark, founders start thinking about switching from raising on SAFEs to raising a priced round. Some founders are content to raise several million on SAFEs, until they get pushback from investors wanting to proceed to Preferred Stock. While the SAFE was designed for early stage investing, there's nothing inherently wrong with using it for larger amounts. However, it's important to understand and model out the conversion mechanics. The most commonly used version of the SAFE, the post-money cap only SAFE, has detrimental impacts if more money than initially intended is raised.

When SAFEs are purchased in larger amounts, particularly by institutional investors, the investors will often request a side letter agreement. The side letter may contain a lot of the rights that exist in later financings, which gives the investor the ability to obtain preferential treatment at an earlier stage than would otherwise be possible.

Related Articles: SAFEs Convertible Notes vs Preferred Stock Investment Rights in Convertible Note Deals  Convertible Note Term Sheet  Preferred Stock Term Sheet