230. Seed Crust: The Dangers of SAFEs

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
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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

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Don't sign a safe that your investor sends you without reading it.

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I don't know if I need to say that, but like, don't do that.

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Yes, there are YC standard docs, and yes, you can do this through Carta, etc.

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Read those things, and if you're getting asked to sign a side letter, read the side letter.

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This has come up the last three weeks, one time a week, and I have been stunned by it.

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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.

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And that gives them sort of the best of both worlds.

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So read that side letter.

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Don't just sign it because you need the cash.

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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.

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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.

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Actually, Carta has a calculator to help you understand the potential dilution of each new save that you take on.

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Companies stay in the seed phase longer be mindful of, of stacking those convertible instruments.

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It's carta.com/safes.

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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.

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The one way in which they are very investor friendly is they have anti dilution built in, if they are post money safes.

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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.

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Probably you wouldn't give him that right.

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It is inherent in every single SAFE that there's anti dilution built in for the first round.

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That is the part that people don't really realize.

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The post money safe is a wonderful invention, but it is not all founder friendly.

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