💡 When is a SAFE not so SAFE?
When you start stacking them.
➡️ SAFE notes are fast and convenient, and take a lot of stress out of pricing a round.
*Personally, I prefer straight equity to ensure everyone is fully aligned but they do offer massive advantages
➡️ SAFE notes have enabled more accelerators and incubators than ever to participate in Startups, but with this current funding environment we are seeing many founders resort to bridge rounds using SAFE notes.
⚠️ Please bear in mind these dangers when stacking SAFE notes.
1. Stacking of SAFEs:
When multiple SAFE notes are issued, they accumulate and convert during the priced round, often at a higher valuation than earlier rounds. This can lead to higher dilution for founders when all outstanding SAFE notes convert at the same time.
2. Delayed dilution:
SAFE notes postpone dilution until the priced round. While this may seem advantageous initially, it can result in a sudden and substantial dilution when the notes convert into equity.
3. Valuation mismatch:
When issuing multiple SAFE notes, the post-money valuation caps may differ for each round. This can create a mismatch in valuation expectations between founders and investors. If the company's valuation increases substantially before the priced round, early investors may receive a larger share of the company.
4. Negotiation challenges:
A complex capitalization table with multiple outstanding SAFE notes can make it difficult for founders to negotiate terms during the priced round. The need to accommodate various conversion terms and valuation caps may lead to unfavourable terms for the founders.
5. Perception of risk:
Investors in the priced round may perceive the company as riskier if multiple outstanding SAFE notes have not yet converted.
✅ Dig into the terms of your SAFE notes and avoid stacking to mitigate over dilution.
✅ Transition from SAFE notes to equity rounds as early in the funding process to manage your dilution risk.
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Derek
Thank you for sharing this information. Founders need to know what are the ins and outs of getting funded.