By 2022, Safes had grown to more than 56% of early-stage deals on AngelList, and some 36% of total capital deployed. In other words, Safes did what they were designed to do: replace convertible notes as a primary deal structure in early-stage startup financing.
Or so we thought. In 2023, according to data from Carta, convertible debt notes have been on the rise, and the percentage of Safe capital deployed has dwindled to 27%. Safes were billed as a way to simplify equity financing for both startups and investors while being less risky for startups than taking on debt. If Safes did reduce the complexity of getting deals done, why is the convertible note now beginning to rise from the ashes?
We think the answer lies in investors demanding more certainty because early-stage startup financing has become profoundly broken. Seed stage investors no longer know what they are getting, if they are getting anything, and the conversion complexity of Safes have made the situation worse. At least with convertible debt, investors know they are getting "something." Increasingly, the something attached to convertible debt comes with draconian provisions collateralizing intellectual property, including patents, trademarks, and source code – in other words, everything of value a startup is likely to have in the early days. Founders, beware.
However, these early investors are not wrong because, over the last decade, they have found themselves increasingly squeezed, often for no good reason. Or rather, the good reason they are squeezed is as sacrificial fodder for the larger VC funds returns through a process of what we call "Shenanigans." We have created the following chart as a prototypical example of what the scenario now looks like to most Seed investors.
The Shenanigans process begins right after the early check writers are too small to lead the next round and extend through the exit process. As if by magic, it is in this process that seed investors, and indeed founders, often find their equity somehow diluted to insignificance for "good reason" – namely, the returns of a cadre of deep-pocket VC funds.
Today, we are announcing the Safer, which we hope will begin to replace the Safe and convertible notes as a better way of funding early-stage startups. The word Safer is a play on the word Safe and stands for Simple Agreement for Future Equity with Repurchase.
We created the Safer, working together with our legal partners at Polsinelli, based on a seemingly radical idea:
Founders and their first-believer seed investors deserve compensation for taking outsized risks.
When a startup uses a Safer, investors buy equity in a startup but with an additional clause allowing the startup to repurchase a portion of the equity based on a percentage of future revenues. This means early investors get a structured exit not strictly tied to a traditional event like a sale or IPO. Importantly, unlike a Safe, Safers do not convert into equity at a future financing round. They convert only at an exit event.
The Safer is born from the understanding that the traditional startup ecosystem, which today prizes the rotten gamble of “unicorn hunting” above all else, often leaves founders and early investors holding the short end of the stick. By providing a financial instrument that prevents founders from yielding substantial equity stakes too early — before they've even had the chance to test product-market fit or evaluate their venture's potential — Safers help preserve the autonomy that makes startups so vibrant and innovative in the first place.
Moreover, the Safer acknowledges the data showing that founder-led startups tend to generate higher returns. By empowering these founders to maintain control, the Safer doesn't just protect their vision — it also enhances the likelihood of superior financial performance.
At the same time, the Safer seeks to correct the longstanding imbalance faced by early-stage investors. Traditional models expose these investors to significant risk while setting them up for considerable dilution in later funding rounds. The Safer flips the script by linking returns to future revenues, ensuring that the pioneers who believed in the startup first stand to reap the rewards proportional to the risk they have assumed.
Ultimately, the Safer isn't simply a novel financial product. It's a clarion call for a more equitable startup financing model — one where the visionaries who birth new ideas and the early believers who back them are given a fair outcome.
Safer Example Payoff• Maintains greater equity control, especially in early stages, allowing them to focus on achieving product-market fit rather than fretting over valuation.
• Reduces risk of losing leadership position or being fired from their own venture.
• Enables more effective decision-making and planning due to fewer complex preferences and terms.
• Preserves focus on vision and innovation, instead of being distracted by the pursuit of the "unicorn" status.
• Avoids becoming locked-in with unfavorable investors.
• Early-stage risk is more proportionally compensated.
• Provides structured exit opportunities, tying returns to future revenues rather than relying on traditional exit strategies that may not happen.
• Reduces dilution risk in successive funding rounds, protecting the value of their early investment.
• Potentially higher returns due to data showing that founder-led startups tend to perform better financially.
• Aligned with the founder's interests, fostering a healthier and more productive relationship.
The Safer is the product of over a year of research at Next Wave Partners, during which we solicited feedback and iterated the concept with dozens of entrepreneurs, investors, and attorneys across the industry. Our sincere thanks to everyone for your feedback and patience.
Today, we are making the Safer Agreement available to everyone under an open license. It is our gift to you, the startup community, in the hopes that we foster a future of entrepreneurship that is fair, balanced, and rewarding for all.
Addressing the glaring issues in traditional startup financing models puts the focus back where it belongs — on building successful, sustainable companies.
In minimizing the impetus on pure unicorn hunting, we hope to foster a more inclusive and equitable startup environment where a more diverse range of companies can flourish, contribute to economic growth, and create a broader prosperity that benefits us all. And hey, as a bonus, unicorns will still happen.
We invite startups, founders, investors, and the larger startup ecosystem to join us in embracing a new era of startup financing that genuinely values innovation, vision, and risk-taking. It's an exciting step towards a future where the relationship between founders and investors is more harmonious, equitable, and conducive to success.
You can find the form of the Safer, example scenarios, spreadsheet, frequently asked questions, and other resources on the Safer website at https://nextwave.partners/safer.
The first version of the Safer is a post-money agreement with a valuation cap. We will post other versions of the agreement in the near future.
Next Wave Partners is a global venture studio and strategy firm partnering with founders and corporate innovators to create bold new businesses, unlock exponential growth, and build better products and services, faster. Founded by repeat entrepreneurs John Cowan and James Thomason, Next Wave Partners offers a comprehensive suite of services designed to meet the evolving needs of today's innovators. Our venture capital fund invests in a broad range of opportunities poised to catch the next long wave of innovation. For more information visit https://nextwave.partners.