This Trend Will EAT Your Seed Round

Old logic: Less than $1M? Use a SAFE.

New logic: Use a SAFE.

But while SAFEs are convenient, they’re also eating your Seed round.

Because here’s the truth:

Founders using SAFEs as a replacement for a priced round are dying by 1,000 cuts of dilution.

Even the grandfather of the SAFE is saying it’s overused.

In the first half of 2024, half the rounds up to $4 million raised were done on a SAFE note (!)

But while SAFEs have many upsides…

• They’re simple & easy
• You can raise faster than a priced round
• You don’t need a lead investor
• You kick the can of the valuation discussion down the road

There are also downsides.

And the biggest one: you can lose a big % of your company.

Here's how to tell if you might want to use a SAFE (or not!):

Question 1: Will SAFEs be commonly-accepted by investors in your industry?

Founders go wrong when they ignore what their investors want, and just assume they’ll be amenable to using a SAFE.

Investment-banker me from 10 years ago would have told you: only use a SAFE if you’re a tech company in Silicon Valley.

Because 10 years ago, investors would give you the fisheye.

No one used a SAFE outside SV.

But today, SAFEs are commonly accepted in most larger markets (NYC, SF, Austin), in other places you still have pockets of investors who prefer convertible notes.

Some investors are just comfortable gambling that your next round will have a nice, big valuation attached…

…but there’s no point trying to use a SAFE if your prospective investors will never sign it.

Question 2: Is the dilution going to sneak up on you?

“SAFEs are great! They let you keep raising money in between rounds!”

But SAFEs can be dangerous too, when you use them as a crutch (or because you can’t find a lead investor).

SAFEs allow founders to continually raise and act as life support for a “walking dead” company…

…and the SAFEs keep piling up.

One founder I knew had $6 million in SAFEs accrued, then tried to go out and raise a $4 million Seed.

Needless to say, it didn’t work - and that’s the situation you want to avoid.

Too many SAFEs, and that next round might never come.

Question 3: Are you better off just going with a priced round?

I’m pretty sure there’s not a founder out there who will tell you:

Raising money is easy!

It isn’t.

But rather than continuing on the SAFE train, it may be worth it to circle the wagons with institutional investors & plan for the big round instead.

Embrace the pre-pitch and go have your conversations with next round’s investors.

Pay attention to the signals they’re going to want to see that will motivate them to invest in your next big round.

Sometimes all it takes is a bit of info, and drawing your own line in the sand.

Then, with any commitments you might otherwise have pulled in on a SAFE, you can instead start chalking up your soft commitments toward that next big round.

Summary

Just because everyone else is jumping off a cliff, doesn’t mean you should too.

SAFEs are great, but for in between rounds.

Otherwise, they can dilute you into oblivion and crush your ability to raise your next round.

Seek advice, and make your own (informed) decisions!