San Diego A relatively new way for startups to avoid putting debt on the balance sheet en route to their first serious round of funding is picking up some traction in San Diego.
About four years after the form of financing was introduced, the financing method, called the Simple Agreement for Future Equity, or SAFE, is becoming more familiar to founders outside of Silicon Valley. That’s where the notion of SAFE was introduced; Y Combinator, the accelerator, invented it as an alternative to convertible notes, a popular debt instrument for early stage startups.
Elan Mevasse, CEO of payments startup Vray in San Diego, is an entrepreneur who decided to use a SAFE instead of a convertible note on the advice of the company’s quartet of advisors.
“It doesn’t add debt to the balance sheet, so you don’t have a small company with no revenue and debt,” he said. “What’s really wonderful is it also allows you to defer final valuation until you get in an institutional investor.”
Institutional investors typically have more experience than those investing more informally when it comes to appropriately determining a company’s worth.
Mevasse’s company, funded so far by angel investors, was recently accepted into EvoNexus, the Irvine Co.-backed accelerator program with sites in San Diego and in Irvine that provides emerging companies with office space, mentorship and access to capital at no cost.
Looking for Bigger Payout
A convertible note is a loan from investors, with all the typical trappings of debt, including an interest rate and maturity date.
That being said, investors in startups aren’t generally interested in getting that loan back: They want the company in which they have invested to use it to grow, and eventually provide them with a much more significant return than they would get were they to invest less riskily.
Even so, those aspects mean notes can be used as leverage against founders who are not performing as promised. But since investors are not truly interested in getting their money back at a low rate of return, negotiating a note’s terms can lead to an awkward dance down the line.
That situation is avoided with a SAFE. That investment converts into equity once a company achieves a financing round.
“The goal of a convertible note is never to really give you a loan, it’s to get equity,” Mevasse said. “The SAFE starts off assuming it’s going to be equity.”