My First Investment in the SAFE structure

Funny things happen when you find entrepreneurs you really want to work with.  Rules/guideposts have a tendency to change.  We often talk about not investing in pre-revenue companies, but sure enough one of our first deals out of the fund was pre-revenue.  Granted, we’ve known the CEO for years and he has made us money before, but still.  We often talk about only doing deals where we price the round and set terms, but then an entrepreneur really wants to do a different structure, so recently we completed our first investment in a SAFE using the ycombinator guidelines.

To be fair, a SAFE isn’t some wild structure and we certainly aren’t the first investor to use it.  You should read through the YC site if you want details, but at the highest level a SAFE is like a convertible note without the debt component.  At the investment date we provided a capital amount and received a contract for a right to future shares.  No interest rate, no term.  If the company raises a VC round in the future, our money will convert at the lower of the valuation that was set in our contract and that set in future VC round.  If the company has a liquidity event before ever raising capital again, we choose the greater of our initial investment amount or the amount we would have received if our money converted at the valuation set in our initial contract (just like convertible preferred equity).  The one scenario not covered is if the company never raises, and never has a liquidity event, but that would be an issue pretty much no matter how you structure a deal.  All other terms are essentially punted to the next financing as we will share whatever provisions the new VC investors ask for.

The primary benefits of a SAFE to founders are speed (there is not much to negotiate other than the valuation-cap) and low legal fees.  In our case, when the founders approached us about doing a SAFE, I was initially hesitant because I thought a priced deal with set terms could still get done fairly quickly and I believe that terms we lead with set a good precedent for future VC financings.  I ended up doing it because my hesitation was outweighed by both me wanting to try something new and wanting to make the deal smooth for the founders.

Having now gone through the process, I’d still prefer to price and set terms in a round to avoid any chance of ambiguity down the road, but I can’t deny how efficient the SAFE is.  It literally took just a few business days to negotiate terms, sign the docs and wire the cash.  It probably saved 45 days and $25K in fees.  45 days may not seem like a lot, but when you’re pushing hard on near-term milestones, its material.

I’m hopeful the structure will hold over time as the company contemplates future financings, and if it doesn’t, I will have learned and it’ll just be good fodder for another blog post.

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