A decade ago, YCombinator, the Silicon Valley startup incubator, launched the Simple Agreement for Future Equity (SAFE). By 2022, SAFEs accounted for over 56% of early-stage deals on AngelList and 36% of total capital deployed. SAFEs replaced convertible notes as the primary deal structure in early-stage startup financing.
However, by 2023, data from Carta showed a resurgence of convertible debt notes, with SAFE capital deployment dwindling to 27%. This shift is due to investors seeking more certainty in an increasingly complex early-stage startup financing landscape. SAFEs, while reducing deal complexity, have added to the confusion around conversion, leading investors back to convertible debt.
Investors are increasingly demanding strict collateral requirements for startups' intellectual property, such as patents, trademarks, and source code. However, this trend should serve as a warning for founders. Over the past decade, investors have often unfairly squeezed startups, which is cause for concern.
We often attribute this squeeze to larger VC funds using seed investors as sacrificial fodder for their returns, a process termed as "Shenanigans." This process often dilutes the equity of seed investors and founders to insignificance, favoring the returns of deep-pocket VC funds.
In response to these challenges, a new financial instrument, the Safer (Simple Agreement for Future Equity with Repurchase), appeared Developed in collaboration with legal partners at Polsinelli, the Safer aims to compensate founders and seed investors for taking outsized risks.
The Safer offers a unique investment opportunity for those interested in startups. It allows investors to buy equity in a startup. It also gives the startup the option to repurchase a part of that equity based on a percentage of future revenues. This structure provides early investors with a structured exit, not dependent on a traditional event like a sale or IPO. The creators made the Safer to protect founders and early-stage investors by making sure that early believers in the startup stand to reap rewards proportional to the risk they assumed. By linking returns to future revenues, the Safer creates a more honest startup financing model. It's not just a novel financial product; it's a call to action.
The Safer seeks to foster a more inclusive and just startup environment where a diverse range of companies can flourish, contribute to economic growth, and create broader prosperity. The Safer Agreement, a product of over a year of research at Next Wave Partners, is now available to everyone under an open license. It is hoped that this new approach to startup financing will foster a future of entrepreneurship that is fair, balanced, and rewarding for all.