But under what required re-payment terms? My understanding is that SAFEs are not really meant to be debt instruments, and that they are highly unsecured / non-collateralized forms of debt.
I was recently screwed over as an angel investor in a SAFE deal where the startup got acquired before their Series A, and I was just completely out of luck. "Thanks for the money, sucka" said the startup. Not verbatim, but that was the idea. Startup got the seed money, founders got the acqui-cash, angel investor chumps got nada.
This is common to all sorts of funding arrangements (the classic example is departed cofounders). The moral of the story is that startups are generally either runaway successes, and everyone gets paid, or they're not, in which case the best case is that a subset of the operators and employees get a soft landing. If you're investing at the seed stage, presumably you should not be expecting to recoup on acquihires.
The acquihire situation happens a lot more than might be anticipated, and usually it's the angel investors left holding the bag. Startups anticipating an acquihire in their future should really look for grants, SBIRs, or other similar funding arrangements because as an angel investor, I have to tell you that the loosey-goosey nature of SAFEs have put me off investing in seed stage startups altogether. I certainly have felt like a chump and not a winner, and I couldn't really celebrate for the startup's "success" as an acquihire.
In fact, the increased size of this SAFE will guarantee more situations where startups exit before the next priced round. The more money that's put into early non-priced / non-secured rounds, the more you open up the door to early exits. This is because you're providing more runway. More runway means more time to develop the business, which also means more opportunities and time to exit before a first round.
Sure. An acquihire is a business failure. If it bugs you that you lose your investment on them, I don't know what to say; I assume that if you're investing at scale, you mostly don't care (your returns are defined by the actual wins); if you're not, I'm baffled by why people do hobby startup investing at all. It seems crazymaking. But then, I'm an, uh, "operator", so I would think that.
It's pretty sad to say this, but the vast majority of Angel investors are hobby investors, not investing at any degree of "scale". And most often, let's be honest, these "investments" should be considered grants to the founders, or perhaps lottery tickets with the expectation of full loss of value, and not really any expected return. It is pretty much crazymaking, as you put it.
But to the point above about losing the "investment" in acquihire situations. The loss is primarily caused by the fact that the investment vehicle is an unsecured non-debt obligation. Which means that there's really nothing to protect the investor in the situation where there's no conversion. If the Acquihire company had instead raised a priced round (the old Seed Series priced round) instead of a SAFE, the investor would be protected. SAFEs should really be "bridge" investments when there is an expected conversion opportunity in the short-term. Not for indeterminate conversions that may or may not ever happen. In fact, if I'm not mistaken, the SAFE note (and convertible debts) originate with the idea of bridge loans, since that makes complete sense in that situation.
Indeed, it's the combination of the hobbyist investor and the Uncapped SAFE notes that are not the best combination. Only sophisticated, at-scale investors should invest in Uncapped SAFE notes, and they can then be prepared for the expected downsides.
Without saying anything about our company's seed investors (I wasn't here when we did the seed round), the YC companies I've been friends with raised their seed rounds from a mix of "firms" (I didn't do much digging but they all seemed to make lots of investments; ie, at scale) and friends or industry acquaintances. It may just be the case that we hear mostly the hobbyist perspective here, because the people who do seed investing seriously don't bother to wade into HN comment threads.
If you kick in on a friend's company, you shouldn't care what happens if their company has a soft landing; having that level of concern over an investment seems like a really good way to kill a friendship. The friendship is more valuable.
Mixing investment and friendship is NEVER a good idea, and is definitely not the situation in my case, nor that of the other angel investors similarly burned in these situations. I live by Benjamin Franklin's words on never a borrower or lender be to friends.
