Choosing SAFE Investors: What early-stage founders should consider

Cody: One question I often get from early-stage founders is: is there any downside to having a lot of investors early on? You know, taking relatively small checks on SAFEs?

My general guidance there is that there's a trade-off between the administrative burden of just going and collecting a lot of signatures, but it's important to note that when the when the SAFE converts in the future, you will likely have to go out and collect signatures from all of the SAFE investors at that time. Generally, that's an easy conversation because early-stage investors are excited that you're raising a price round and it's good news, and there are contractual requirements in the SAFE to sign on to future stockholder agreements.

From your perspective, is there anything else that founders should be thinking about or concerned about when thinking about who to take money from? How many investors they want to raise money from? Any other concerns along those lines?

Nick: You make a great point that the SAFE converts automatically in connection with the priced round, and there is an obligation to sign the stockholder agreements and other documents related to the price round. But the venture investors who are leading your round – if they're sophisticated – will likely expect and require all of those SAFE investors to sign documents anyway, notwithstanding that their SAFEs convert and it's all been factored in and taken into account in connection with the financing.

You want to make sure that these are people who are going to cooperate and work with you in connection with that transaction and not throw up roadblocks or speed bumps. As well, there's a little bit of 80-20 rule going on, where some of these small investors, in my experience, are going take more of your time than some large investors.  A $5,000 check to someone where that represents most of their available cash, it's going to be very meaningful to them. Whereas a $5,000 check, to a venture investor is not going to be worth writing.

People who are not as sophisticated in these transactions may require more of your time and attention and may have different and frankly, sometimes unrealistic expectations. Be thoughtful about who you take in. It's hard to turn down money! I have a very hard time telling my clients to not take money when they need it. But you need to be thoughtful about what the consequences of taking some of those checks can be.