Considering offering seed round with SAFE opposed to Searchfund with a PPM

October 25, 2023

by a searcher from Northeastern Illinois University in Chicago, IL, USA

New to the site and not the most experienced with search funds. I have been self-funding my search for acquisitions so far. I'm considering offering a seed round with a SAFE (Simple Agreement for Future Equity) as opposed to conducting a traditional search fund with a PPM. Is this a good idea? My back office is on the AngelList Stack platform and it makes it simple and cost effective to get funding rounds up and running (I did a mock test trial).

The reason I ask is that I have been busy submitting offers to off market manufacturing companies in the Chicago area. I submitted a total of 58 offers to manufacturers with a total collective annual revenue of $381.8M. I could be more aggressive on my campaign follow up if I had the equity partners on deck. I have 2 board members with over 50 years of collective acquisition experience on the team but I'm the Founder & CEO (work horse for now). Their involvement is limited until we get more responses from the campaign and their assistance is more needed.

I would like to get some feedback on this if I can.

Reply by a professional
from Ivey Business School at Western University in Toronto, ON, Canada

I echo what Brian said - a SAFE is meant for companies that are very likely to raise money. A SAFE has a 'backup' option in case the company sells before the SAFE converst into equity, but that's not the scenario that any investor is picturing when they sign a SAFE.

SAFEs make sense for early stage companies that are hard to value. They dont really make sense in the SMB M&A context.

SAFEs are very pro-company (they arent debt, they may never convert, etc.), and I cant imagine the average investor would be interested in this like Brian said.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

I work with startups and searchers, and I like the creative thinking with this approach, but I think there are definite challenges. The basic premise of the Safe is that a single company will raise a subsequent round of equity at a significantly higher valuation, offering a windfall risk premium to the Safe holder and conversion into a senior class of preferred stock. There's no interest and very limited creditor rights if things go bust. I don't think it will be attractive to family offices or PE funds or other search investors, but I could be wrong.

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