When SAFEs Aren’t SAFE for Startup Founders

An article we liked from Thought Leader Steve Reale from Ulu Ventures:

As seed-stage investors, we at Ulu Ventures are lucky to cross paths with entrepreneurs who are tackling the next great set of challenges across the enterprise, consumer, healthcare, and sustainability spaces.

At the seed stage, most of the founders we meet have mustered the courage to quit their regular jobs, convinced their loved ones of their drive and focus, and often raised some friends-and-family capital to get started. It’s an exciting time to be building something from scratch.

Technology businesses starting today are incredibly capital efficient compared to the first generation of internet companies. When I was the director of finance at an early-stage startup in the year 2000, we wrote a $550,000 check for back-end development and a $720,000 check for front-end design, all while we were still a zero-revenue eCommerce startup. Times have changed for sure—but it still costs money to get a company launched, so financing conversations remain critical.

Plenty has been written about SAFEs versus convertible notes regarding what’s founder-friendly versus investor-friendly, what’s debt and what’s not, etc. The important thing for entrepreneurs to understand is how these large convertible securities loom in capital structures; this is where SAFEs get unsafe and notes get gnarly! It’s like an iceberg … the convertibles and SAFEs below the water are deadly, even though the bit poking up above the waterline looks great.

Raising money in convertible securities is often quick: the documents are easy and there are fewer terms to negotiate. Once the money is raised, these notes sit on the balance sheet as debt in the case of convertible notes, and as a promissory “secret handshake” if we’re talking about SAFEs. It’s common for us to see companies that have raised several rounds of convertibles, often with improving terms to the company, such as higher caps or lower discounts. This is generally great, because that capital is being put to good use in hiring teams and building products. However, the debt keeps growing …

Read the rest of this article at Ulu Ventures…

[Thank you to Jason Goodman for the photo on Unsplash]

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