SAFE: A popular technique for securing early-stage funding
The SAFE (Simple Agreement for Future Equity) instrument has become a popular technique for securing early-stage funding. It has surpassed the popularity of convertible bonds in seed funding. With SAFE, investors make an up-front investment with an agreement to convert it into an equity deal at a valuation to arrive at later or future funding rounds. Unlike a convertible bond, it is not a debt prior to conversion and it has no maturity date or interest payments associated with it. Investors for startups accord importance to valuation and that finally leads to conversion. Venture Capital (VC) firms and Investors before issuing the SAFE instrument assess every detail of valuation. On the basis of this assessment, they make their projections.
It is also evident that the traditional SAFE instrument does not offer key investor protection compared to a convertible bound. But on several other parameters such as ease of implementation, costing, SAFE is well-suited for both venture capitalist firms and fund-seekers. Seed funding Canada has been witnessing wider use of the SAFE instruments. Angel investors in Ontario prefer SAFE to any other traditional instruments.
Priced and unpriced seed rounds
Priced and unpriced seed rounds are in practice these days. A priced seed round is similar to any other round of fundraising in that the firm is valued, and investors purchase shares in the company for cash at a price defined by the valuation. The company isn’t given a valuation in an unpriced round, and the investor isn’t necessarily buying a fixed amount of equity at the time of investment. Rather, it’s an agreement between the investor and the company to issue shares in a later, priced round in exchange for a capital infusion during the unpriced seed round.
In a rush to get advanced rounds of seed funding, founders of startups believe that postponing pricing until the valuation is higher. In several cases it found that sooner or later the equity will be priced and past and current dilution will come in, all at one time – this will effectively deliver a compound effect on founder dilution. Hence, by deferring the pricing everyone is taking a risk.
Raising seed funding from Venture capital firm
Valuation caps and discounts, for example, allow investors to buy shares at a cheaper price than the current market price. This raises the number of shares they can purchase, resulting in the creation of more shares. For an entrepreneur, raising seed funding from VC firms is one of the top priorities. However, modes of getting capital seeds sometimes appear confusing and complex. There are several instruments being used by investors for startups. Seed funding leads to the advancement of startups and entrepreneurs. They know that valuations and fresh rounds of funding can lead to dilutions of their and early investors’ stakes in the company over time.
JC Team Capital 