Skip to content →

Category: Accelerators

Why Colorado Startups Shouldn’t Use YC’s SAFEs

The “SAFE,” which is short for “Simple Agreement for Future Equity” was created by Y Combinator as a template document for seed financings. In its original form, the SAFE was essentially a convertible note without interest or a maturity date. 

In Silicon Valley, data shows that SAFEs took up a significant amount of market share for seed rounds. That’s not surprising, because SV is a world unto itself in terms of the density and level of competition of capital available for startups; and also far more inclined to a “billion or bust” growth culture among entrepreneurs than other parts of the country and world. That culture creates a “lottery ticket” dynamic in seed funding where hyper-standardization of terms and rapid closings are seen as a facilitator of broad portfolios. 

Put that many funds into such a small geographic area, and they will compete on who can be the most lenient in their terms. The original SAFE was about as lenient as an investor instrument could be. In SV, a significant portion of the investor community swallowed their concerns and funded SAFEs. But outside of SV, the dynamics are totally different. 

In the Denver/Boulder ecosystem, which due to its composition behaves much more like Austin or Seattle than Silicon Valley, the vast majority of investors rejected the original SAFE as too one-sided. As a firm that doesn’t represent tech investors (only companies), we tend to agree. Some asks from investors are perfectly reasonable, and if you try to avoid them, you can unintentionally signal that you don’t intend to actually deliver on your promises. 

We’ve seen convertible notes with low interest (2-5%) and a 2-3 yr maturity (plenty of time to use your seed funding to achieve a major milestone) become much more of a dominant seed structure than the original SAFEs. The maturity date serves as a basic accountability mechanism for investors to ensure that the company intends to eventually achieve a milestone that converts the notes to equity. Handing investors a SAFE, knowing that they are far more comfortable with more balanced convertible notes, can therefore send a bad signal.

Recently, YC updated their SAFE docs to make them far more company unfriendly than before in terms of economics/dilution. Without getting too “in the weeds” the SAFE templates now available on YC’s website are structured to have post-money valuation caps, instead of the original pre-money caps. This makes their economics far harsher than most seed structures, and so startups should exercise extra caution in adopting them. There’s a growing feeling that, as YC has grown and changed leadership, its investment posture is starting to look far more like an investor focused on maximizing returns than a (air quotes) “founder friendly” player. Their new post-money SAFE structure is a reflection of that.

In Colorado, convertible notes and seed equity are the main options for seed funding, which would typically be defined as $1.5MM or less of early money. While convertibles are far faster to close on, seed equity is still much leaner in terms of fees and time than a full VC-style deal, and can provide greater alignment between investors and the company. Work with advisors specialized in early-stage funding to sort out the appropriate structure that protects the company, while accommodating the expectations of your lead investors. 

If the original pre-money SAFE failed to become the “standard” for seed rounds outside of SV (including in Colorado), because investors felt it was too dismissive of their interests, the new post-money SAFE should similarly be rejected by companies for offering bad economics. 

For a deeper-dive into the recent SAFE changes, why startups should avoid SAFEs, and better structures for seed rounds from lawyers specialized in raising capital outside of SV, see: Why Startups shouldn’t use YC’s Post-Money SAFE. 

Leave a Comment

What Startup Accelerators Do

Background Reading:

When most people think of the core value of top-tier universities, they think it’s obviously to educate top students. While that may be true, there is a strong argument that education is actually secondary to top universities’ “sorting” function; in other words, by credibly filtering out and selecting the most elite among millions of students, universities help employers and other people find those students more easily.

Sidenote: there’s empirical evidence suggesting that students who get into the ivy league but don’t attend do just as well as those who do attend, lending backing to the idea that top universities are far more about sorting and finding talent than developing it.

Top-tier accelerators are the elite universities of startup ecosystems. As “doing startups” has become more of a thing and the number of entrepreneurs has gone up (correlating inversely with the drop in cost of starting companies), business ecosystems have become far more “noisy.” More pitches, more teams, more ideas, make it much harder for interested investors to sort through and find the cream. It’s the exact same problem employers have with students.

Here in Colorado, Techstars is clearly the most notable accelerator, although there are others here and throughout the country. Ask entrepreneurs about the value of the educational content of these accelerators, and feedback will vary; but almost universally founders will say that the top ones pay for themselves simply from the network they open up for you by putting their stamp on your startup; just like a Harvard or MIT.

Are accelerators necessary for startup founders to succeed? Absolutely, positively not. The large majority of successful companies we work with never touched an accelerator. But for entrepreneurs lacking strong connections to investors and other key players early on, they can dramatically accelerate a startup’s ability to find capital, advisors, etc.; and should be strongly considered.

Leave a Comment