Early-stage fundraising can be a very stressful process with a ton of uncertainty and your startup’s future at stake. Typically involving what can seem like endless conversations with countless people, finding a VC with genuine interest in investing in your company can take quite some time.
So when you do reach an investor who’s interested, you don’t want to be caught off guard on how to seamlessly manage the next steps. In this blog, we explain what simple agreement for future equity (SAFE) notes are, when (and why) you should use them, and where to blend them into an end-to-end fundraising process using DocSend.
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First things first: What is a SAFE note?
A SAFE note is a type of convertible note, which is itself a simple form of debt. In exchange for the investor giving your startup money now as a loan, in your next “priced” round they can convert this debt into preferred shares at a pre-negotiated rate. SAFE notes are commonly used during the pre-seed and seed stages when it’s expensive and time consuming to do a full priced round. (See our blog post on “To price or not to price your funding round).
In other words, think of a SAFE note as a legally binding IOU between you and your investors in early rounds of funding. When you eventually enter a priced round down the road, this IOU note will convert to actual equity for your investors. Sell your company before reaching a priced round? The note covers investors here as well, letting them make a premium on top of the money they gave you to protect their investment no matter the outcome.
What’s the difference between a SAFE note and a priced round?
Raising money for your startup on SAFE notes versus raising money in a priced round are two very different processes. A few of the most touted benefits to raising money on SAFE notes are:
- It’s cheaper because you don’t need to pay expensive legal fees like you do when you raise a priced round.
- It’s faster because you defer some of the more difficult negotiating around preferred share rights to your next priced round.
- It’s easier because you don’t necessarily need a lead investor and you can sign SAFE notes one at a time as you find investors (in a priced round, closing happens all at once).
- It’s a standard document. You’re only changing investor economic terms, not legal terms. This makes it a much faster and cheaper process than priced rounds.
- There’s no interest or maturity, so an investor’s ownership stake won’t change based on how long the note is held.
- It offers more flexibility. Founders can reward earlier investors with more favorable valuation caps using SAFE notes, or can issue SAFE notes on a rolling basis with different terms as investor interest increases.
- It’s streamlined and simple. This makes it faster for startups to reach an agreement with investors for funding.
On the flip side, pricing your round is generally better for investors as it gives them more controls and safeguards. Some of the common reasons that investors will ask to price the round of funding include:
- When a round is priced, preferred shares are actually created and issued to investors.
- These preferred shares typically come with rights, like a 1x liquidation preference and the ability to approve important events like selling the company, raising more money or increasing founder salaries.
- Pricing a round often comes with creating a board and putting in basic corporate governance. Having a history of good corporate governance is very helpful down the road for raising more capital or selling the business (and it’s required to go public).
- Since due diligence is performed during priced rounds, it makes it easier to raise money down the line.
- Priced rounds require more upfront accounting and negotiating than SAFE notes, but they also provide a clearer picture of how much your company is worth.
- Investors get more control rights with a priced round, including voting rights, anti-dilution rights, and a potential seat on the board as a lead investor. Lead investors can act on your behalf to drum up interest in your company and raise more capital. As a founder, you may get more money as a result of having an institutional lead, but you also have to cede more control to investors.
- Offers clear terms and certainty on dilution: It takes more time to negotiate the term sheet of a priced round, but detailed guidelines can help prevent misunderstandings and problems down the road. Plus, agreeing on a pre-money valuation gives you a better idea of how much company ownership you’re giving up.
- Investors have more protection and rights with priced rounds, so they may be inclined to invest more money than they would with a SAFE note.
When should founders use a SAFE note vs. a priced round?
If you’re raising $200,000 to a few million dollars and want to get it done quickly so you can get back to building your company, and you think you’ll then be able to raise a larger round in a year, then raising on SAFE notes could be a smart idea. This is what they are designed for. It really doesn’t make sense to pay $70,000 in legal fees to price a round if you’re only raising $500,000.
If you’re raising $5M+ in your round, or you have a lead investor taking most of the round, it often makes sense to price the round. Practically speaking, this means you use a legal firm to do all the corporate paperwork and issue preferred shares. Paying $70,000 in legal closing fees is a lot less of an issue when raising $5M+.
It’s important to note here that pricing a round isn’t as scary as it sounds and it’s something you’re going to have to do eventually anyway. The main questions here are:
- What will allow you as the founder to get back to building as fast as possible?
- What are reasonable controls to give investors based on your stage and the amount they are investing?
Why SAFEs are a safe bet for early-stage founders
Put simply, SAFE notes give founders a faster, more affordable way to raise money in early rounds of funding. Rather than spend extra time doing in-depth due diligence or getting caught up in legal paperwork and costs, you can simply send a SAFE note to your investors to sign. Because there are no legal terms to negotiate, only economic ones, you don’t need to involve a lawyer.
This makes drawing up agreements, and getting them signed, a much quicker process for founders and investors alike. SAFEs are also a common industry practice and you can even download a standard template from Y Combinator to use. If your investor is interested, they can sign the agreement on the spot once you’ve sent it over to them, all within DocSend.
An additional benefit for founders is that the agreement isn’t considered active or executed until you’ve countersigned it. What this means is you can send a SAFE to multiple interested investors to start building out your pipeline. Once you have multiple investors and signed SAFEs, it’s up to you on which ones to countersign based on your pipeline activity.
Likewise, SAFE notes are appealing to early investors. A SAFE note offers them security and protection in terms of the valuation cap and conversion discount. When investors know their rights are protected, they’re often more willing to risk investing in your company. As a founder, you also understand what, exactly, you’re signing up for.
If you’re interested in learning more about which economic terms are most commonly negotiated in SAFE agreements, check out our post on “How to negotiate your SAFE note like a pro.”
What kind of tools are needed to execute a SAFE note?
While some founders still send SAFE agreements over email, using the right tools to execute your SAFE notes is a critical part of successful fundraising. This is exactly where a tool with secure signatures and document analytics can help. Knowing whether an investor has viewed or signed your SAFE note helps you understand where to best prioritize your time and negotiate better.
It also lets you know how serious someone is about investing in your company and where to follow up with them about unanswered questions. For example, say an investor looked at your SAFE note a couple times last week but hasn’t signed it. This is a great opportunity to reach out and ask about any follow-up questions they might have, closing the deal faster.
Founders who use DocSend to send their pitch decks can also use the platform to execute and manage their SAFE notes as well. Incorporating SAFEs into the end-to-end fundraising process helps you build a more seamless investor experience, and a SAFE note can be sent for eSignature from DocSend once you’ve engaged with interested investors.
Chris Boncimino, co-founder of Flow Networks, shares that he looks to DocSend analytics and its eSignature capabilities at the end of their investor outreach strategy. When an investor signals their high intent to invest, Chris uses DocSend to send a signable SAFE note and quickly close the deal. “DocSend covers us through the entire fundraising process,” Chris said. “Investors view our pitch deck and all financial documents in DocSend, so when it comes time to close our deal, e-signing SAFEs with DocSend allows for a seamless experience.”
Signing a SAFE note via DocSend in five steps
Executing, managing, and signing SAFE notes in DocSend has never been faster or easier for founders (and investors!). Since founders can use the SAFE note as a template, there’s no need to re-upload every time you work with a new investor. Simply complete the document with two required signatures: one for the founder and one for the investor. The founder just needs to fill in the “Amount raised” field before it goes to the investor for their signature. You and your management team will also benefit from viewing and managing all of your documentation in a single platform that provides you with best-in-class analytics.
You can start sending your SAFE notes in DocSend using the following five steps.
- Step 1: Download the standard template for SAFE notes from Y Combinator.
- Step 2: Fill in the company name, your name, and the valuation cap. Include any specific terms and conditions, such as “most favored nation” which ensures an investor receives the most favorable terms at all times.
- Step 3: Upload your SAFE note to DocSend, dragging and dropping the signable fields.
- Step 4: Send out your SAFE note via a DocSend link.
- Step 5: Collect investor signatures seamlessly.
Ready to simplify your fundraising process and speed up funding? Get started collecting signed SAFE notes with DocSend’s eSignature here.