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We wanted to summarize our data set and trends in SAFE and convertible note financing from our law firm’s perspective in 2019–2020. In the ever-evolving world of startup financing, we have seen a considerable shift in market trends when it comes to convertible debt instruments. The biggest driver of changes has been the introduction of the SAFE and the advent of post-money SAFE.

Data Set
Our client base consists predominantly of foreign entrepreneurs and investors using American style documents across various geographies (EU, LATAm). Our transactions originated in Silicon Valley and outside of the US. We analyzed 50+ pre-seed and seed deals for the last 12 months, including priced rounds where SAFEs and convertible notes where being converted.

YC Variance
Out of all the companies we have worked with at the pre-seed financing, 20% of the companies consisted of Y Combinator companies. All these YCombinator companies have used SAFEs as a method to raise debt financing with equal preference given to pre-money and post-money SAFEs using valuation caps of $8 million and above.

Our data suggest that SAFEs have become a preferred instrument for pre-seed financing with companies with higher valuation thresholds, whereas convertible notes are generally used by low to medium valuation thresholds. Valuation caps ranging from $2–5 million consisted of 25.5 % of our total deal volume. Valuation caps ranging from $6–9 million consisted of 38.8% of our total deal volume. Valuation caps ranging from $10+ million consisted of 35.7% of our total deal volume.

SAFEs vs. Convertible Notes
Our analysis of our pre-seed and seed deal flow suggests that 70% of our clients have utilized SAFE instruments and the remaining 30% were traditional convertible notes. Traditional convertible notes have been used mostly by serial entrepreneurs and certain accelerators.

Post-Money vs Pre-Money
Our analysis suggests that 70% of the pre-seed and seed financing are done with a pre-money valuation caps (both convertible notes and SAFE 1.0). The remaining 30% where financings with post-money valuation caps.

Side Letters
Requests for side letters from investors in convertible note financing start at $100,00 threshold. In case of SAFEs, the investment threshold is as low as $50,000 with roughly 16% of the pre-money SAFE holders and 36% of the Post-Money SAFE holders being given side letter rights. The three most common terms requested in side letters where pro rata rights, information rights and observer rights. Observer rights where predominantly requested by venture capital funds.

Investor Feedback
Investors have accepted SAFEs, however, they are still frequently unaware of the subtle differences between the pre-money and post-money SAFEs. This includes angels and VCs that are in the “spray and pray” school as well more structured funds.

Carta vs. Shareworks
We also wanted to point out that 52.3% of clients are using Carta and 47.7% Shareworks to manage their SAFEs/convertible notes.

In conclusion, the pre-seed investment practices is slowly moving towards the use of SAFEs over convertible notes with the new post-money SAFE instruments gaining traction over the pre-money SAFEs.

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