SAFE vs Priced Round
One of the first questions founders ask is whether a SAFE or a priced round is more favorable. While at 1984 we prefer SAFEs, we believe the instrument doesn’t matter; what matters is working with the right investor and minimizing overall dilution for the founder. Though most investors are comfortable with SAFEs, some still prefer priced rounds because their mandate requires a board seat (which a priced round provides).
Below is a summary of the main difference between SAFEs and priced rounds.
More Streamlined
From a round standpoint, a SAFE is better for the founder in two distinct ways
- Simple: A SAFE is Simpler and less onerous (you won’t negotiate founder vesting/option pool/etc).
- Round Flexibility: while a priced round often has a minimum and a maximum dollars raised, a SAFE doesn’t have a notion of the round, allowing the founder to collect signatures one by one.
Control
SAFEs provide founders with more control at the early stage of the startup since the investors are not shareholders. Specifically:
- Founder can sell the company without needing investor consent
- Company can also issue additional options or enter into other financing agreements without needing the consent of investors.
Cost
SAFEs are free—and can be downloaded from YC’s website or used from legal startups like Clerky. You should always use a counsel when negotiating side letters though. Meanwhile A priced round typically costs $5k-$25K at the seed stage—although many law firms are wiling to offer a fixed price for the company’s first equity financing.
Dilution
While a priced round’s pre-money conversion is more favorable to founders than a SAFE’s post-money conversion, the difference in dilution between these two methods extends beyond this simple comparison. It depends on several factors that founders can’t predict in advance:
- The number of SAFE rounds raised
- The size of the option pool demanded by Series Seed investors compared to Series A investors, and the number of options granted between rounds
- Potential founder departures before the next priced round
- The possibility of an M&A event
Let’s examine these factors in more detail.
Priced Round Dilution Across Multiple Rounds
Imagine A VC invests $2M at a priced round with a valuation of $8M pre-money/$10M post money. Assuming the company has 2M outstanding shares at the time of the financing, the price per share will be 8M (valuation) / 2M (shares) or $4. The investor will receive 500,000 shares:
| Starting ownership (shares) | Starting ownership (%) | New shares | Ownership after Investment (shares) | Ownership after Investment (%) | |
|---|---|---|---|---|---|
| Founder A | 1,000,000 | 50% | 1,000,000 | 40% | |
| Founder B | 1,000,000 | 50% | 1,000,000 | 40% | |
| Seed Investor | 500,000 | 500,000 | 20% | ||
| 2,000,000 | 100% | 2,500,000 | 100% |
Now imagine that a year has passed by, the company has limped along and needs additional capital. A new investor agrees to invest an additional $2M at the same valuation as before.
| Ownership before Investment (shares) | Ownership before Investment (%) | New shares | Ownership after Investment (shares) | Ownership after Investment (%) | |
|---|---|---|---|---|---|
| Founder A | 1,000,000 | 40% | 1,000,000 | 33.33% | |
| Founder B | 1,000,000 | 40% | 1,000,000 | 33.33% | |
| Seed Investor | 500,000 | 20% | 500,000 | 16.67% | |
| Seed Investor 2 | 500,000 | 500,000 | 16.67% | ||
| 2,500,000 | 100% | 3,000,000 | 100% |
The new investor has now bought 500,000 shares, or 16.67%, and diluted all the existing shareholders equally by 16.67%. The new valuation of the company is now 3M shares * $4 per share or $12M post money.
Safe Dilution Across Multiple Rounds
Now Imagine the same scenario takes place but using the SAFE instrument. The first VC will invests $2 million with a post-money SAFE and a $10M cap. Then, a year later, the second VC will also invests $2 million with a post-money SAFE and a $10M cap. When these rounds convert, each investor will get 20% and the difference in the dilution will be borne by the founders and existing shareholders
| Ownership before Investment (shares) | Ownership before Investment (%) | New shares | Ownership after Investment (shares) | Ownership after Investment (%) | |
|---|---|---|---|---|---|
| Founder A | 1,000,000 | 40% | 1,000,000 | 30% | |
| Founder B | 1,000,000 | 40% | 1,000,000 | 30% | |
| Seed Investor | 666,664 | 666,666 | 20% | ||
| Seed Investor 2 | 666,664 | 666,666 | 20% | ||
| 2,500,000 | 100% | 3,333,332 | 100% |
The Effect of the Option Pool
Most priced rounds will include an option pool requirement—while SAFE agreements typically do not mention option pools. The option pool will dilute the founder further, and, depending on how large, can more than make up for the difference in dilution between multiple SAFE rounds and multiple priced rounds.
Better for Founder departure
If a founder departs before the seed and next round, having raised on a SAFE is much more favorable to the remaining founders from an equity standpoint. (Basically their shares will go back to you / existing shareholders but not to the safe holders) This is described in detail in the Founder Departure section
Conclusion
Safes and Priced Rounds are really 6 one way half dozen the other. Today most early stage investors are comfortable with a SAFE, while multi-stage funds sometimes prefer the control and share representation that a priced round provides. Either is fine. What’s more important for a founder is having the right investors around the table, and not selling too much of the company upfront.