Why using a SAFE is the best option for a founder to protect themself from bozo-investors

aPhoto by Nick Fewings on Unsplash

We almost deployed our fifteenth check to an early-stage startup. It’s time to share with you some thoughts about why founders should always prefer to raise capital using a SAFE. SAFE stands for Simple Agreement for Future Equity, and it was created by Y Combinator a few years ago. A SAFE is a kind of convertible note, without debt. An investor that writes a check to a startup knows very well that he could lose every penny of that investment. But what if he doesn’t? Some of these investments come from small VCs — pre-seed or seed stage — , and some from angel investors.

In both cases behind those checks, there are people, and people sometimes freak out and do stupid things. They believe they are better than others, and try to be the bad guys at the table. When things go wrong, and the startup they invested in is not going to keep the promise to make you a wealthier investor, then you wished you signed a SAFE instead of a convertible note.

The reason is pretty simple — as you can imagine. If you lend money, there’s always a chance that people want to get their money back. In “startup land” shouldn’t be like that because when you invest, you know that you have a high chance to lose your money and a tiny chance to get your capital back with a 2x, a 10x or a 100x multiplier. A convertible note is a debt with an option to convert into shares with some advantages, and if things are doing well, you shouldn’t worry at all. But that is just 10, 20 or maybe 30% of cases. For the remaining 90, 80 or 70% of the startups, one day or another the founder will send an email to his investors telling them:

Sorry, but we are going to shut down the company. bla bla bla… It’s been a journey.

It happens very frequently, and that’s the moment where bozos can get mad and do stupid things — like asking for their credit back if the convertible note expired recently.

If there no money left, then there’s no way to get your “credit” back, dumb-ass. But it happens, especially if some of your investors come outside Silicon Valley. If they signed a convertible note they have the right to ask for it, and even if people say it never happen, it can. It’s just that these are the kind of news that you don’t read on TechCrunch. Period.

Don’t trust investors all around the world. You don’t know them, big or small. If they don’t have a good local reputation—or if they don’t have a reputation at all—, get your capital in the bank avoiding to sign a convertible note. A SAFE is easier to understand, all YC companies are signing them, and your investors should be happier too—because they know their dilution upfront.

Why do you want to be liable and get your life ruined by the wrong investor?

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We look for mission-driven founders, pre-product-market fit. We love to back distributed teams with HQ in Silicon Valley.

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Massimo Sgrelli

Massimo Sgrelli

Software engineer & venture capitalist @ LombardStreet Ventures. I love my family, coding, and writing.

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