Should a startup seek funding in form of a SAFE (Simple Agreement for Future Equity)?

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JASON LEMKIN

SAFEs are great — until they aren’t.

There is one huge benefit to using a YC SAFE that many gloss over. Unlike almost any form of convertible debt, the YC SAFE is a known entity. For that reason alone, I prefer a YC SAFE to anything else like it, to any form of convertible debt, even if it’s more “founder friendly”.

I’d much, much prefer a standard YC SAFE to some random form of promissory note I have to hire a lawyer to review and look for land-mines in. YC SAFE’s have the only protection provision that matters. They can’t be amended without my consent. Amending terms without my consent is the huge rip-off in debt-like instruments. The rest, apart from valuation, I could care less about.

The problem with SAFEs is not that they are founder-friendly (who cares at the margin), it’s that they don’t scale.

No institutional investor is going to invest $1m, or at least $2m+, with a SAFE. No good one.

So use the right tool for the job.

If you are raising a small amount, and have a hot start-up, use a SAFE.

If you aren’t. Then be cool. And use a different tool.

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Published on December 20, 2016
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