A SAFE is a simple agreement for future equity: an early investor provides cash now for a promised ownership stake later, typically at a lower price than institutional investors pay. For friends and family, that promise can be easier to handle than a complicated financing instrument—but personal relationships make the risk feel very real. section 5.1
Before using one, keep these practical points in view:
- A SAFE sets terms for institutional financing, no later outside investment, and company failure without money to repay note holders. section 5.1
- The instrument is simple, fast, and relatively company-friendly, while traditional convertible notes generally provide investors more protections. section 5.1
- Treat family participation cautiously: seeing the investor regularly can make a potential loss an ongoing personal burden. section 5.1
- A seed program can use a SAFE for a defined equity stake; one cited example provides $500,000 for 7% equity. section 5.2
The family-round test
An entrepreneur offered an investment to one family member, who could tolerate losing the money. Even so, the entrepreneur felt constant pressure because that person would remain part of everyday life. The lesson is simple: a SAFE may simplify the paperwork, but it does not simplify the emotional consequences of a failed investment. section 5.1
Table 5.1 The who, what, and when of the various stages of venture capital financing rounds
|
Round
|
Pre-seed
|
Seed
|
Series A
|
Series B
|
Series C
|
|---|---|---|---|---|---|
|
Form
|
Cash or debt
|
Equity
|
Preferred “A” equity
|
Preferred “B” equity
|
Preferred “C” equity
|
|
Who
|
Founders Friends and family
|
Venture capitalists Angels
|
Venture capitalists Corporate
|
Venture capitalists Private equity Corporate
|
Private equity Corporate
|
|
What
|
Early working capital to get to first financing
|
First formal financing round after formation from investors focused on early-stage investing
|
First significant financing round in which one or more VCs become involved in a company previously financed by founders, seed VCs, and/or angels
|
Scaling round when the company has proven it is able to grow fast
|
Management and investors are contemplating an exit and need to prepare and raise the value of the company in preparation.
|
|
When
|
Immediately upon formation
|
When they agree with and buy into your “story” of opportunity
|
Once proof of product-market fit is shown (typically three paying customers)
|
When sales and marketing are what is needed to grow
|
When the company is contemplating an exit
|
|
Size
|
$100,000 to $750,000
|
$1 million to $2 million
|
$2 million to $10 million
|
$10 million to $25 million
|
$25 million and up
|
Use the financing-round table to place SAFEs in the early pre-seed and seed fundraising path alongside founders, friends and family, angels, and venture capitalists. section 5.2
