3 Reasons Why SAFE Notes Can Ruin Your Company

SAFE notes are like tattoos - once you have one done, you keep wanting more! I have seen an abundance of rounds funded on SAFE's going up to $3M in capital. Although a very efficient way to raise money from a timing and expense perspective, SAFE's can be a detriment to founders and companies for three reasons.

Dilution:  Yes, you forgo having to price your round at the stage in which you raise your SAFE; however, I rarely see a SAFE without a valuation cap. Thinking you are getting friendlier capital because you get a SAFE over a priced round is make-believe. The note will convert on the post-money, and you will be just as diluted as if you priced the round at the value cap. 

Discipline:  When a founder keeps raising money in nebulous amounts, I find those founders are never super accountable to the milestones they are trying to achieve for that funding round. I don't see this ill-intentioned, but SAFES's nature and ease create an urgency to get money in quickly without having to think through what you are trying to achieve for this capital round.

Compounding Dilution (Dilution + Lack of Discipline= CD):    The third reason is a combination of the first two reasons. Stacking notes on top of other notices can create a spiral of dilution for founders because they never put a line in the sand for themselves on what they are trying to achieve on the funding round. They believe they can raise another note if they miss their milestone. When all of these notes convert, the founders can leave very little of their company left.

SAFE notes do have their place. Smaller rounds less than $1.5M provide 6-months or so of runway to either bridge companies to another round or for seed-stage companies where the cost of doing an equity financing doesn't make sense.