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.
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, which was made popular after Y Combinator released this standard template. 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 the difference between a SAFE note and a priced 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.
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?
What kind of tools are needed to execute a SAFE note?
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.”
In the full blog post, you'll learn more about the difference between a SAFE note and a priced round, why SAFEs are a safe bet for early-stage founders, and the process of signing a SAFE note via DocSend in five steps.
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