For Seed Funding, SAFEs Have Won Against Convertible Notes

Nearly 80% of the early-stage financing on AngelList is now done through SAFEs.

The earliest round of financing a company raises is typically done with a convertible instrument, rather than a priced equity round. Priced equity rounds are long, expensive, and opaque legal documents—all adversarial attributes for early-stage startups. In contrast, convertible instruments are typically a page or two long and lay out, simply, the transaction and conversion terms.1

There are two major types of convertible instruments that startups use: convertible notes and SAFEs ("Simple Agreement for Future Equity"). Convertible notes, a well-trod path, are debt instruments that convert into stock at the company's next financing. Many online generators for them exist, and law firms like Orrick and Cooley offer them, too.

In late 2013, YCombinator introduced the SAFE, and AngelList data shows a rapid uptick in their use since then. To compare SAFEs with convertible notes, we filtered down the thousands of individual investments that AngelList tracks to only those that both:

  • Used convertible instruments with a valuation cap (where specified) of under $20 million
  • Were issued before a company had a priced equity round. This helps to isolate seed-stage financing by removing so-called "bridge rounds"—an investor loan that helps a startup get from one round of funding to the next.

Seed-Stage Convertible Investment Share, By Year

Source: AngelList

From January 2019 through July, we've seen almost 80% of early-stage convertible financing done through SAFEs, rather than convertible notes. Interestingly, this suggests AngelList deal flow is qualitatively different from angel investing more broadly. The recently published 2019 Angel Funders Report from the Angel Capital Association shows that in the 2018 deals where U.S. and Canadian angel groups invested, 44% used convertible notes, while just 1.6% opted for SAFEs.

AngelList data showing the rise of SAFEs also fits well with my experience as a seed investor in the Bay Area. The first SAFE my investment group, Indicator, was offered was in 2016. We were wary: Would a SAFE ever be more than just a sheet of paper? Since then, that and several others have become real stock, and we no longer consider them to be less desirable than convertible notes.

But where does this trend go from here?

The ACA's data suggests a broad class of early-stage investors still don't have experience with SAFEs, but AngelList's data shows Silicon Valley has largely moved over to using them. As more seed investors gain familiarity with SAFEs, they'll do more than grow in popularity. We see a not-too-distant future where SAFEs completely overtake convertible notes in the earliest rounds of startup financing.

1 Sometimes the first round a company raises is in fact a priced equity round, typically a "Series Seed," led by a VC with some angel participation. But because convertible instruments can be issued without any investor notification, if the earliest round that AngelList has data on is a priced round, we cannot tell directly if that round was really the first money into the company or if it was preceded by one or more convertible instruments. In contrast, if the earliest financing that AngelList has data on is a convertible instrument, it is straightforward to tell in our data if there has already been a priced round. Consequently, we restrict our analysis here only to convertible instruments.

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