AI Founders Turn to SAFE Notes Amid Gold Rush for VC Funding

AI Founders Turn to SAFE Notes Amid Gold Rush for VC Funding

Financial wizardry is nothing new in the venture world, but the rise of AI startups has sparked a return to the funding mechanism known as SAFE.

A SAFE, or simple agreement for future shares, was started by venture capital heavyweights Y Combinator as a way to raise money that was a more founder-friendly alternative to convertible notes.

Instead of a conventional equity investment, investors commit a certain amount of financing, such as collateral, and in exchange receive shares in the company at a future date.

The funding option has been around for some time, but the format has been revived by the recent spate of AI funding rounds and the buzz around the sector.

As investors rush to invest in lively but often nascent AI businesses, SAFEs have reemerged to solidify investor commitment without diluting initial equity stakes.

There have recently been a number of such agreements on both sides of the Atlantic. They range from Perplexity AI, a San Francisco-based company that uses generative AI for search, which raised $63 million at a $1 billion valuation, to Artisan AI, a YC startup that recently raised $7.3 million. dollars in initial investment.

Similarly, using uncapped or unpriced convertible notes in this way has been the preferred option for non-U.S. companies, such as France’s Mistral. and H, which have raised hundreds of millions of dollars alternatively alongside listed equity rounds over the past year.

Additionally, Jonas Templestein, co-founder of London-based fintech unicorn Monzo, is reportedly using the mechanism to raise funds for an artificial intelligence startup.

SAFE tickets are attractive because they are effectively priceless. They often allow small companies that are not yet generating revenue to raise money quickly without multiple questions from investors about valuation. Generally, investors who commit financing through SAFE will receive a discount on the valuation of the company’s next round of listed shares.

“Overall, SAFE Notes are founder-friendly,” Shaun Johnson, founding partner at AIX Ventures, told Business Insider. “The reason they are founder-friendly is because… first, there is no price set. Second, there is no board of directors created. All control remains with the founders, and three; the investors have no the long tail”. of rights they will obtain in a pricing round. “The rights are very limited.”

However, financing in this way can be a difficult task for investors. “I’m not a big fan as an investor because you don’t know your property, which is key for me,” David Sainteff, a partner at Global Founders Capital in Paris, told Business Insider.

“We see these deals in hot markets, like AI, in highly competitive rounds. It makes sense because you need to raise a lot of capital without diluting it, which makes sense for AI given the cost of talent and servers is huge “.

“We decided to use a SAFE instead of doing a priced round to save over $50,000 in legal fees associated with a priced round,” Jaspar Carmichael-Jack, founder and CEO of Artisan AI, told Business Insider. “This also makes it much easier to attract people to the round: we can send the SAFE in a few minutes and receive the money the same day.”

Outside the United States, founders may use similar structures with relevant parties. Seed Legals, a London-based company that helps companies understand fundraising and social capital, has created its SAFE mechanism model, SeedFast, to match the YC product, for example.