Why SAFE Funding is Crucial For Startups
Everyone wants to build an app or has an app idea. The reality is not everyone has the money to pay for app development. More over not everyone even has the understanding of what it takes or cost to get an app from development into the App store.
So What is SAFE Funding:
The SAFE ( Simple Agreement for Future Equity) is used primarily on the west coast (Silicon Valley specifically). SAFE Funding is used primarily to replace convertible notes. The SAFE Funding approach is considered to be simpler and clearer that other funding structures.
SAFE funding is intend the safe to remain fair to both investors & founders. West Coast & Investors and some Accelerators like Y Combinator look favorably upon the development of SAFE Funding as a start tool. In my opinion though not popular on the East Coast yet, this form is evolution of the convertible note. I truly hope the startup community finds & uses it effectively as an easier way to accomplish the funding goals.
Features of a SAFE:
- SAFE Funding is not a debt instrument. There is no maturity dates or subordination agreement
- SAFE Funding is not a loan, it will not accrue interest. T
- SAFE Funding is one-document security without numerous terms to negotiate
Since a SAFE Funding has no expiration or maturity date, isn’t a loan and has minimum stipulation, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like an minimal attorney fees.
How it Can be Used at the Start:
Let’s say you have the idea. You build the team of 3. Each of you takes 1/3rd of the company. You, the idea person. The developers whom is a graphic designer and a UX (User experience) UI (User Interface) person. And the core coder whom puts up the initial script used for the HTML.
Now lets move things ahead 6 months. Today, you are no further along than you were to start. You and the Coder are doing your part producing content for the website. But your UX / UI person is not pulling their weight. You need a new UX / UI person. But your current UX / UI person feels that this is the next facebook and isn’t willing to go away silently. You now have 1/3 of you company given away to a hostile party and you have nothing to show for it. Add that to the mix along with you have not more money to produce anything beyond what you you have today.
SAFE Funding For Apps is the ability to not give away the farm at the start of the business.
Proving a proven model is what you need to do to get the initial investor. The seed round of funding allow you to build the business with ideally friends and family. As you disclose all the risk, you allow people to understand what the opportunity is. People want to be a part of something. So let people know what the opportunity is and what the risks are.
Here is the rub, as you build the business SAFE funding is a scalable approach to you business that speaks to the SEED round of business. You don’t give away the farm. You look at what it takes to have a pro-rata (proportion) share of the business based upon metrics. You set the metrics, and the process.
VC & Customers Alike. Might not need all the features you think you want to offer. Do one thing really well. Then talk to 100 customer. After talking to the 100 customers to really define what you are doing, talk to the 100 VCs. See what their apatite is for a product or a market like what you have to offer. You’d be surprised what the result is based upon the a little effort.