December 9, 2023

safe round, or simple Future equity agreements have been around since Y Combinator invented them a decade ago. But they play a different role in 2021, becoming a fast-moving tool that helps startups close deals in just a few days. Before that, they were used to close early rounds or between rounds.

But the market looks very different now. Valuations have started to level off and deals have slowed. The power dynamic seems to be shifting toward investors and away from the founder-friendly market we’ve been in for the past few years.

Still, investors see value in SAFE’s structure. TechCrunch+ talked to seven companies about this deal format, and they all said they still think it’s still largely the sweet spot for early-stage funding rounds, but VCs have boundaries and always prefer priced rounds.

Earnest Sweat, founding partner at Public School Ventures Syndicate, said he thinks SAFE is still a good bet for those looking to raise early-stage capital, especially if they aren’t raising money at insane valuations in 2021. But for others, Sweat said he’s not sure it makes sense. “For established companies that are raising bridge funding, the question is: What is the bridge funding for this funding? Why can’t companies raise pricing funding?”

Other investors agree. Greg Smithies, a partner at Fifth Wall, said the SAFE note could be a good option at the pre-seed and seed stages, but also said his firm encourages founders to do a pricing round. Companies that use this form to avoid downside financing should stop avoiding the inevitable.

“Valuations in 2021 are never going to come back, and it would be disingenuous of yourself and your LPs (investors) to pretend they will,” Smith said. “So, just go ahead and do the next round. Reset valuations to the new reality we’re currently in.”

Investors also voiced their thoughts on SAFE having no valuation cap, raising such funds after the seed stage, and how to be more investor-friendly.

Who we interviewed:

Earnest Sweat, Founding Partner, Public School Ventures Group

How have the questions about raising SAFE you’ve received from current and future portfolio companies changed over the past two years?

Today’s startups (current and future) are looking at the market more rationally. Most valuations are more in line with lower P/E ratios than what we saw at the peak in 2020 and 2021. I think the SAFE note is a favorable option for pre-seed or seed companies that haven’t raised capital at the peak of the market in 2021 or raised capital at a relatively conservative valuation during that time.

I still see convertible notes being done in this environment, but it’s better for new/older companies than growth stage companies. For established companies that are raising bridge financing on notes, the question is what is the purpose of this financing? Why can’t companies do pricing financing?