It has been nearly ten years since YCombinator, the famend Silicon Valley startup incubator, launched the Simple Agreement for Future Equity, or “Safe” for quick.
By 2022, Safes had grown to greater than 56% of early-stage offers on AngelList, and a few 36% of complete capital deployed. In different phrases, Safes did what they had been designed to do: substitute convertible notes as a major deal construction in early-stage startup financing.
Or so we thought. In 2023, in accordance to information from Carta, convertible debt notes have been on the rise, and the proportion of Safe capital deployed has dwindled to 27%. Safes had been billed as a method to simplify fairness financing for each startups and buyers whereas being much less dangerous for startups than taking over debt. If Safes did scale back the complexity of getting offers completed, why is the convertible notice now starting to rise from the ashes?
We suppose the reply lies in buyers demanding extra certainty as a result of early-stage startup financing has turn into profoundly damaged. Seed stage buyers now not know what they’re getting, if they’re getting something, and the conversion complexity of Safes have made the scenario worse. At least with convertible debt, buyers know they’re getting “something.” Increasingly, the one thing hooked up to convertible debt comes with draconian provisions collateralizing mental property, together with patents, emblems, and supply code – in different phrases, every little thing of worth a startup is probably going to have in the early days. Founders, beware.
However, these early buyers are usually not flawed as a result of, over the final decade, they’ve discovered themselves more and more squeezed, usually for no good purpose. Or relatively, the good purpose they’re squeezed is as sacrificial fodder for the bigger VC funds returns via a technique of what we name “Shenanigans.” We have created the following chart as a prototypical instance of what the situation now appears like to most Seed buyers.
The Shenanigans course of begins proper after the early test writers are too small to lead the subsequent spherical and prolong via the exit course of. As if by magic, it’s on this course of that seed buyers, and certainly founders, usually discover their fairness in some way diluted to insignificance for “good reason” – particularly, the returns of a cadre of deep-pocket VC funds.
Introducing the Safer
Today, we’re saying the Safer, which we hope will start to substitute the Safe and convertible notes as a greater method of funding early-stage startups. The phrase Safer is a play on the phrase Safe and stands for Simple Agreement for Future Equity with Repurchase.
We created the Safer, working along with our authorized companions at Polsinelli, based mostly on a seemingly radical thought:
Founders and their first-believer seed buyers deserve compensation for taking outsized dangers.
When a startup makes use of a Safer, buyers purchase fairness in a startup however with a further clause permitting the startup to repurchase a portion of the fairness based mostly on a proportion of future revenues. This means early buyers get a structured exit not strictly tied to a standard occasion like a sale or IPO. Importantly, in contrast to a Safe, Safers don’t convert into fairness at a future financing spherical. They convert solely at an exit occasion.
The Safer is born from the understanding that the conventional startup ecosystem, which as we speak prizes the rotten gamble of “unicorn hunting” above all else, usually leaves founders and early buyers holding the quick finish of the stick. By offering a monetary instrument that stops founders from yielding substantial fairness stakes too early — earlier than they’ve even had the likelihood to check product-market match or consider their enterprise’s potential — Safers assist protect the autonomy that makes startups so vibrant and modern in the first place.
Moreover, the Safer acknowledges the information exhibiting that founder-led startups have a tendency to generate greater returns. By empowering these founders to preserve management, the Safer would not simply defend their imaginative and prescient — it additionally enhances the probability of superior monetary efficiency.
At the similar time, the Safer seeks to right the longstanding imbalance confronted by early-stage buyers. Traditional fashions expose these buyers to important threat whereas setting them up for appreciable dilution in later funding rounds. The Safer flips the script by linking returns to future revenues, making certain that the pioneers who believed in the startup first stand to reap the rewards proportional to the threat they’ve assumed.
Ultimately, the Safer is not merely a novel monetary product. It’s a clarion name for a extra equitable startup financing mannequin — one the place the visionaries who delivery new concepts and the early believers who again them are given a good consequence.
Safer Benefits
For Founders
• Maintains better fairness management, particularly in early levels, permitting them to give attention to reaching product-market match relatively than fretting over valuation.
• Reduces threat of shedding management place or being fired from their very own enterprise.
• Enables more practical decision-making and planning due to fewer complicated preferences and phrases.
• Preserves give attention to imaginative and prescient and innovation, as an alternative of being distracted by the pursuit of the “unicorn” standing.
• Avoids changing into locked-in with unfavorable buyers.
For Investors
• Early-stage threat is extra proportionally compensated.
• Provides structured exit alternatives, tying returns to future revenues relatively than counting on conventional exit methods that will not occur.
• Reduces dilution threat in successive funding rounds, defending the worth of their early funding.
• Potentially greater returns due to information exhibiting that founder-led startups have a tendency to carry out higher financially.
• Aligned with the founder’s pursuits, fostering a more healthy and extra productive relationship.
Open and Free for Everyone
The Safer is the product of over a 12 months of analysis at Next Wave Partners, throughout which we solicited suggestions and iterated the idea with dozens of entrepreneurs, buyers, and attorneys throughout the business. Our honest thanks to everybody for your suggestions and persistence.
Today, we’re making the Safer Agreement out there to everybody below an open license. It is our present to you, the startup group, in the hopes that we foster a way forward for entrepreneurship that’s truthful, balanced, and rewarding for all.
Addressing the evident points in conventional startup financing fashions places the focus again the place it belongs — on constructing profitable, sustainable firms.
In minimizing the impetus on pure unicorn looking, we hope to foster a extra inclusive and equitable startup atmosphere the place a extra various vary of firms can flourish, contribute to financial development, and create a broader prosperity that advantages us all. And hey, as a bonus, unicorns will nonetheless occur.
We invite startups, founders, buyers, and the bigger startup ecosystem to be a part of us in embracing a brand new period of startup financing that genuinely values innovation, imaginative and prescient, and risk-taking. It’s an thrilling step in the direction of a future the place the relationship between founders and buyers is extra harmonious, equitable, and conducive to success.
Resources
You can discover the type of the Safer, instance situations, spreadsheet, steadily requested questions, and different assets on the Safer web site at https://nextwave.partners/safer.
The first model of the Safer is a post-money settlement with a valuation cap. We will put up different variations of the settlement in the close to future.
About Next Wave Partners
Next Wave Partners is a worldwide enterprise studio and technique agency partnering with founders and company innovators to create daring new companies, unlock exponential development, and construct higher services and products, quicker. Founded by repeat entrepreneurs John Cowan and James Thomason, Next Wave Partners provides a complete suite of companies designed to meet the evolving wants of as we speak’s innovators. Our enterprise capital fund invests in a broad vary of alternatives poised to catch the subsequent lengthy wave of innovation. For extra data go to https://nextwave.partners.
…. to be continued
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