SAFE notes are commonly used in startup fundraises.

They most often come with a valuation cap.

This means the valuation will not rise above that cap no matter what the priced round that follows.

For an investor, an uncapped SAFE note can reduce the return on the investment tremendously.

Some founders offer a discount only on the SAFE note to provide a return.

The investor gets the discount amount as their return based on the next valuation round.

While this may sound attractive, it takes the potential unlimited upside off the table for the investor.

It’s best for the founder to set a valuation cap for the SAFE note and provide the full return potential to the investor.

In setting the valuation cap, use the pre-money valuation one would expect if it were a priced round.

While the valuation cap does not have to be exact, it will give some comfort to the investor.

Some founders spend a great deal of time trying to sell investors on uncapped SAFE notes.

Their time is better spent closing prospective investors and finding new investors.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.