SAFE rounds, or simple agreements for future equity, have been around since Y Combinator invented them a decade ago. But they took on a different role in 2021 when they became a fast-moving tool that helped startups close deals in mere days. Before that they were used to close really early rounds or were used between financings.

But the market looks very different now. Valuations have started to level out, and deals have slowed down. The power dynamics seem to be swinging back toward investors and out of the founder-friendly market we’ve been in for the last few years.

Investors are still seeing the value in the SAFE structure, though. TechCrunch+ spoke to seven firms about this deal format, and they all said they still thought it was largely the best option for early-stage rounds — but VCs have boundaries and would always prefer a priced round.

Earnest Sweat, the founding partner at Public School Ventures Syndicate, said he thinks SAFEs can still be a great option for people looking to raise early-stage capital — especially for those who didn’t raise at crazy valuations in 2021. But for others, Sweat said he’s not sure it makes sense anymore. “The question for established companies that are raising bridge rounds that are notes is: What is this funding bridging to, and why can’t the company raise a priced round?”

Other investors echoed this as well. Greg Smithies, a partner at Fifth Wall, said that SAFE notes can be a great option at pre-seed and seed stages, but he also said that his firm encourages founders to do a priced round instead. Companies that are using this format to avoid a down round should stop avoiding the inevitable.

“The valuations of 2021 are never coming back, and it would be disingenuous to yourself and to your limited partners (investors) to pretend that they are,” Smithies said. “So, just take the down round. Reset the valuation to the new reality that we’re currently in.”

Investors also expressed their thoughts around SAFEs without valuation caps, raising these kinds of rounds beyond the seed stage, and how they can be more investor friendly.

Who we spoke to:

Earnest Sweat, founding partner, Public School Ventures Syndicate

How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?

Today’s startups (current and prospective) are looking at the market more reasonably. Most valuations are more aligned with lower multiples than we saw at the peak in 2020 and 2021. I’m seeing SAFE notes as a favorable option for pre-seed or seed companies that didn’t raise capital in the peak 2021 market or that raised at a relatively conservative valuation during that time.

I’m still seeing convertible notes getting done in this environment but it’s more favorable to newer/earlier companies rather than those in the growth stage. The question for established companies that are raising bridge rounds that are notes, is what is this funding bridging to and why can’t the company raise a priced round?

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