Tech start-ups load up on SAFE notes but face a big problem in 2023

“Next year many SAFEs will convert. Usually they are based on a round of equity, but now they only convert based on the maturity date and it does so at a set price. [if the company does not raise again]”

Trouble is around the corner

Valuations set in this year’s clutch of SAFEs were generally fixed, Mr. Heine said, but there were provisions to convert them below the stated price or at a discount to future equity rounds.

Due dates put pressure on founders to complete their next raise before that time if they believe they can raise at a higher valuation. If the founder starts the process, needs capital, but cannot find investors willing to invest at a higher price, this opens up the real problem of 2023.

The big scary thing hanging over our heads is that the next round will be a down round. This is a real disaster, so let’s hope it doesn’t happen to the founders.

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“There are a lot of ifs and buts…but transformation [at a maturity date] It won’t be a completely negative outcome for the founders because they can anticipate what the dilution will be now and consider that they have already ceded it.

“But if there is a bearish round, many investors will also have anti-dilution mechanisms, which means that this round will have a much greater negative impact on the founder than previous investors, and it will have a huge impact.”

For companies around the Series A stage, most SAFEs raised are between $1 million and $3 million, and most are designed to extend the company’s bond for 12 to 18 months.

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Larger companies will be hit harder

Given the large number of bridging rounds this year, startups will need to grow to their previous values ​​to avoid bearish rounds in 2023.

This will have a greater impact on larger companies, which may already have shown valuations on their investor books – such as Canva.

Music licensing platform Songtradr is tapping the market for new investment, shedding 17% to US$425 million, compared with March when it started a rally that was later reversed.

Buildxact also took a very minor haircut to its valuation when it returned to investors in early September to raise an additional $5 million in capital, valuing it at $121.3 million after money, compared with its $125 million valuation in January. gave

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But, according to Mr. Heine, for the most part, companies have delayed setting a new valuation this year.

Gavin Appel, founder of Ignition Lane, said founders make decisions that ensure the survival of their companies, but investors have an obligation to act in the best interest of startups.

“Their main responsibility is not to run out of cash,” he said.

But this is a long game. It’s important for both founders and investors to understand that founders need to be highly motivated to maximize long-term shareholder returns – do they have enough skin in the game to hit the stars and deliver big returns?

Founders may be more diluted than last year or the year before, and that may not be a good thing for investors either.


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