May 9, 2024

230. Seed Crust: The Dangers of SAFEs

230. Seed Crust: The Dangers of SAFEs
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Season 4

Text your thoughts directly to Rich.

Peter & Allyson share about some of the things founders should be aware of when raising money on SAFE notes.

Seed Crust: State of the Seed Market 1H 2024
Most startups at Seed are circling around, unable to break through to Series A. We're calling this the Seed Crust. I recently released a market report covering: 

  • The market forces behind this
  • What it will take for this to change
  • The paths forward for founders stuck

Download the report and watch the event here: https://vcminute.substack.com/p/seed-crust 


About AVL Growth Partners
AVL Growth Partners, founded in 2009, is the leading fractional Finance and Accounting firm supporting organizations in pivoting from growth to scale. AVL brings an experienced team of CFOs, Controllers, and Accountants to your organization, delivering transparent, strategic actions for short and long-term success. Transform your financial approach affordably with AVL, supporting companies coast to coast - get to know AVL Growth Partners at avlgrowth.com. (Sponsored)

About SpringTime Ventures
SpringTime Ventures seeds high-growth startups in healthcare, fintech & insurtech, and logistics & supply chain. We look for founders with domain expertise, forging a path with a truly transformative technology. We only invest in software-based businesses in the USA. We bring a people-focused approach, work quickly, and reach conviction independently. Our initial check size is $600k. You can learn more about us and our approach.     

Transcript
WEBVTT

00:00:01.000 --> 00:00:04.019
Don't sign a safe that your investor sends you without reading it.

00:00:04.830 --> 00:00:07.919
I don't know if I need to say that, but like, don't do that.

00:00:08.160 --> 00:00:11.460
Yes, there are YC standard docs, and yes, you can do this through Carta, etc.

00:00:12.009 --> 00:00:16.320
Read those things, and if you're getting asked to sign a side letter, read the side letter.

00:00:16.963 --> 00:00:21.092
This has come up the last three weeks, one time a week, and I have been stunned by it.

00:00:21.842 --> 00:00:28.342
Investors use the safe because it's quick and easy and cheap, and then they will use the side letter to get quasi priced round rights into your company.

00:00:28.753 --> 00:00:30.533
And that gives them sort of the best of both worlds.

00:00:30.582 --> 00:00:31.783
So read that side letter.

00:00:31.783 --> 00:00:33.710
Don't just sign it because you need the cash.

00:00:34.552 --> 00:00:42.393
The other thing too on this is you have to do what you have to do when you are fundraising and if you need money, but be mindful of stacking SAFEs.

00:00:43.197 --> 00:00:52.271
I have known founders who, when they finally do the priced round, are very shocked by how much they got diluted from those prior SAFEs.

00:00:52.601 --> 00:00:57.892
Actually, Carta has a calculator to help you understand the potential dilution of each new save that you take on.

00:00:58.392 --> 00:01:03.341
Companies stay in the seed phase longer be mindful of, of stacking those convertible instruments.

00:01:04.326 --> 00:01:05.656
It's carta.com/safes.

00:01:06.227 --> 00:01:15.986
But to be very specific, the reason why that happens is because SAFEs seem very founder friendly because they're quicker, they're cheaper, you don't need lawyers, etc.

00:01:16.456 --> 00:01:22.260
The one way in which they are very investor friendly is they have anti dilution built in, if they are post money safes.

00:01:22.813 --> 00:01:31.090
Which means if you were negotiating a price round with Rich, say, he and you would go back and forth for a long time as to whether he got anti dilution rights on his equity.

00:01:31.219 --> 00:01:32.829
Probably you wouldn't give him that right.

00:01:33.569 --> 00:01:37.719
It is inherent in every single SAFE that there's anti dilution built in for the first round.

00:01:38.329 --> 00:01:41.060
That is the part that people don't really realize.

00:01:41.060 --> 00:01:45.310
The post money safe is a wonderful invention, but it is not all founder friendly.