SAFE notes, or a Simple Agreement for Future Equity, are a way for early-stage startups to raise money before preferred (or priced) rounds. In return, the investor gets an agreement for future equity in the startup once certain events occur, such as a large financing round or liquidation event.

Benefits of SAFE Notes

• No immediate sacrifice of equity 
• Simple and fast documentation and negotiation process 
• Less debate over valuations 
• Flexible timelines for future equity conversions 
• Used by many types of investors around the world 
• Many years of legal precedent

Considerations when using SAFE Notes

SAFE notes can have downsides. Founders could miss hidden risks while closing deals.

Investor Benefits of SAFE Notes

SAFE notes also have advantages for investors, such as: 

1. Discounted shares

2. More favorable valuations

These benefits come from what are called “discounts” and “valuation caps.”

Discounts

A discount lowers the price per share for the SAFE note holder when the company sells its stock. These discounts are usually around 10-25%. The exact discount is specified in the SAFE note terms.

Valuation Cap

A SAFE Note valuation cap is a bit more complex. Investors want lower valuation caps, and founder want higher valuation caps. If the sell price is higher than the valuation cap, the investor gets equity at a more favorable price. If the sell price is lower than their valuation cap, then their investment will generally convert at this lower price. 

Elements of a SAFE Note Agreement

A SAFE note includes many elements. Below are some of the key ones to be aware of:

• Investment Amount: the amount of investment the investor is providing to the startup. This is the initial investment amount that will be converted into equity at a later stage.
• Valuation Cap: the maximum valuation at which the investor’s investment will convert into equity. This ensures that the investor receives a fair deal when the future conversion event occurs. A valuation cap is not the same as a company valuation.
• Discount Rate: the percentage discount applied to the price per share when the SAFE note converts into equity during a preferred/priced round. This discount benefits the investor and is specified in the SAFE note. It’s generally between 10-30%.
• Conversion Price Formula: how the conversion price per share will be calculated, often using the valuation cap X the discount rate.
• Maturity Date: the date when the SAFE Note will convert into equity if a conversion event doesn’t occur.

There are many other common terms in a SAFE note, however, these are the main ones we wanted to bring to your attention.

You should seek the advice of an attorney within the specific country you need to issue a SAFE note. 

SAFE Note Example

Scenario

Imagine you’re the founder of a tech startup called “AI Pet” that’s working on a groundbreaking new product. You need funding to develop your product and grow your business. An investor, “Big Pet Funding Capital Group,” is interested in supporting your startup.

• Investment Amount
  Big Pet Funding Capital Group has decided to invest $100,000 into your AI Pet startup to help with product development and other expenses.
• Valuation Cap
  You and Big Pet Funding Capital Group agree on a Valuation Cap of $2.2 million because you have a solid team, have a prototype, have some interested customers, and have industry experience. This means if the SAFE note investment converts to equity, it will never convert at a valuation worse than $2.2 million.
• Conversion Event
  The SAFE note has two conversion events: A raise from a bona fide investor and you do a preferred (or priced) round and preferred shares are created OR No raise occurs from a bona fide investor within the next 12 months. In this case it will convert based upon the valuation cap. 
• Discount Rate
  It was also agreed that Big Pet Funding Capital Group would get a discount rate of 20%. This means that when the conversion event occurs, Big Pet Funding Capital Group will get their equity shares at a 20% discount compared to the price per share paid by other investors in that funding round.
• Conversion Price
  Example 1: If AI Pet’s valuation at the time of the preferred (or priced) round is $2.5 million, other investors might buy shares at this valuation. But Big Pet Funding Capital Group would get shares at the valuation cap of $2.2 million.
  Example 2: If AI Pet’s valuation at the time of the preferred (or priced) round is $1 million, other investors and Big Pet Funding Capital Group would get shares at this $1 million valuation since it’s less than the valuation cap.
• No Interest or Repayment
  It’s important to note that this investment doesn’t accrue interest, and there’s no requirement for AI Pet to pay back the $100,000.

For Big Pet Funding Capital Group, this SAFE note process helped reduce the negotiation required on the valuation and reduce the risk of what would happen if the valuation came in lower at the preferred (or priced) round. This is why SAFE Notes can help speed up the negotiation and investment process between investors and founders.

Get advice on how to structure your startup funding approach

apply now

Conclusion

Using SAFE Notes can be an efficient way for startups to raise funds more quickly and with less friction during the negotiation process, however, you still need to consider the features, benefits, risks, and how to structure them correctly.

The post About SAFE Notes appeared first on GetSturtupFunding blog.

As a company, we’ve worked with 100’s of SaaS startups over the past 10 years and helped many startups launch from ideas to successful, profitable companies. We’ve been on both sides: as an investor in startups and helping startups raise additional startup funding. 

Below is advice on what to include in investor presentations.

Below are the key slides we consider when evaluating an investment into a SaaS startup or when helping a SaaS startup with fundraising efforts: 

1. Cover Page

Clean and professional looking cover page with your business name and logo. You may also want to include the date of the presentation on this slide.

2. Problem

Offer a clear explanation of the problem your startup is solving. What pain point are you addressing? Why does this problem exist and what is the current impact?  Use quantifiable data where available.

3. Solution

Provide a clear and simple explanation of how you plan to solve the problem.

Share information such as:

• Why solving the problem is important
• Why it hasn’t been solved before
• Why this is the right time to solve it
• Why you are the one to solve it

Try to include specific figures or data to illustrate the impact. Focus on the benefits to your potential customers.

4. Traction 

Demonstrate the progress you’ve achieved so far in areas such as:  

• Market validation 
• Community building  
• Customer acquisition  
• User engagement 
• Early adopters of platform

This slide is important because traction validates demand for your product in the market.

5. Competitive Analysis 

Describe how you will differentiate yourself from your competitors and how you will build a defensible, unique competitive advantage.

Explain why it will be difficult for others to copy your approach.

Show why you’re in a special position to succeed against existing competitors.

6. Team

Show potential investors why your team possesses the skills and qualities needed to make this business successful. Highlight any relevant past achievements or industry expertise that will contribute to ensuring this success.

Investors want to invest in a team who they believe can make the startup successful.

7. Use of Funds

Communicate the amount you are trying to raise, investment terms, and your plans for utilizing the funds.

For example, you may intend to use the funds for areas such as: sales, marketing, product development, legals fees, research & development, etc.

8. Market Potential

Estimate the realistic market opportunity for your business. Provide quantifiable data to illustrate the potential size and value of the market you aim to capture. This is important because it will also help determine what type of investor you should pitch to. Make sure you can communicate a well thought out customer acquisition plan when asked.

9. Market Validation

Demonstrate how you’ve confirmed the demand for your solution in the market and validated people or businesses are willing to pay for your product to address this need.

Share evidence, such as customer feedback, user engagement, early adopters, surveys, pilot programs, or more importantly paying customers. This will help validate your solution’s market fit and revenue potential.

10. Target Market

Describe your ideal customer profile (ICP), based on any completed market research and market validation. You might have one or two ICPs for your product.

11. Revenue Model 

Illustrate the revenue model for your business.

12. Contact Info

Share your contact details for investors to reach out to you, including email, LinkedIn URL, mobile telephone, website, and other relevant information.

We provide funding, resources, and technical leadership to help SaaS startups succeed

apply now

Conclusion

Incorporating these elements into your investor pitch deck will not only provide a comprehensive view of your SaaS startup, but also enhance your prospects of securing funding and achieving success in the market.

The post SaaS Startup Investor Presentation Cheat Sheet appeared first on GetSturtupFunding blog.