Grants for New Zealand Startups

Raising seed capital can be a significant hurdle for the founders of a new technology company. The Simple Agreement for Future Equity, or SAFE note, offers a straightforward path to funding, standing as an alternative to traditional financing methods or a convertible note.

This article explores SAFE notes, how they function, their key differences from convertible notes, and why they might be a great option for your tech startup.

What Is a SAFE Note?

The SAFE note was first introduced by Y Combinator in 2013 to simplify the funding process for early-stage startups.

Unlike traditional funding methods, SAFE notes eliminate the need to value the business. This is particularly beneficial for entrepreneurs who may not be able to justify a short-term valuation to investors when the company has not yet found product-market fit.

SAFE notes also remove other complexities, such as interest rates, maturity dates, and loan obligations that come with convertible debt. Investors provide capital or services upfront in exchange for future equity in a startup, typically at a discount. The transfer of equity takes place only if a conversion event occurs in the future, such as a financing round of at least $1m, helping to avoid early equity dilution.

How Do SAFE Notes Work?

SAFE notes are designed to streamline the way early-stage startups engage with investors.

Here's a breakdown of how they work:

Initial Investment

Investors provide startups with capital or services upfront, but instead of receiving immediate shares in the company, they receive a promise of future equity. This is where the "simple" in SAFE note comes into play, as it cuts through the complexities of traditional investment terms.

Trigger Event

The note converts into equity only if a defined trigger event, also known as a conversion event, occurs. This event could be the startup's next priced equity round, an IPO (Initial Public Offering), a liquidation event, or another significant event. The conversion is based on a simple set of predefined conditions that aim to benefit the investor, acknowledging the early investor’s support with favourable terms.

Valuation Cap & Discount Rate

These are the two critical elements that dictate the conversion terms.

Valuation Cap

The valuation cap sets a maximum valuation at which a SAFE converts into equity, ensuring they receive a fair share of the company relative to their early investment, even if its valuation skyrockets.

Usually it will be set at the expected valuation at the time of the next trigger event. For example, if you believe you are likely to raise capital for your Series A round at a $20m valuation in 12 months, $20m might become your valuation cap.

Discount Rate

The discount rate is another mechanism that aims to provide investors with equity at a lower price than that offered to investors in the next round of financing. Again, this serves as a reward for the SAFE note holder’s early investment risk.

The most common discount rate used by startup companies in Australia and New Zealand is 20%. However this varies depending on factors such as founder experience, the industry, and whether the trigger event is expected to happen very soon or if it’s unlikely to happen for a long time.

Transfer of Equity

When a trigger event occurs, the notes convert into preferred stock or common stock depending on what was agreed. The conversion price favours the investor by converting at the more advantageous option between the valuation cap and the discount rate outlined in the SAFE agreement.

Benefits of SAFE Notes

There are several founder-friendly reasons SAFE notes make sense for early-stage startups, particularly those who have yet to establish a pre-money valuation, and their investors.

Benefits for Startups

Flexibility

Capital raising through SAFE notes offers the flexibility to secure capital without setting a pre-money valuation, streamlining the fundraising process.

Speed

SAFE notes enable faster closing of funding rounds. This speed allows startups to secure capital when needed quickly and helps new investors join your cap table efficiently.

Simplicity

With fewer complexities than convertible notes, SAFE notes reduce paperwork and legal fees.

Growth Focus

With no interest or maturity dates, startups can concentrate on scaling their business without the burden of debt repayment.

Solvency

Depending on the terms, SAFE notes are typically treated as equity on the balance sheet, rather than debt, thus removing their impact on the balance sheet solvency test.

Benefits for Investors

Early Access to Investment Opportunities

SAFE notes offer investors a chance to back startups early, by simplifying the process of making an investment.

Potential for High Returns

Given the discounted equity and potential for significant valuation increases, investors can achieve high returns on their initial investment if the startup performs well.

Alignment with Startup

The conversion of SAFE notes into equity links investors' success with the startup's growth. Pro rata rights also allow investors to keep investing in later rounds, fostering a partnership-focused approach.

Discounted Equity

Investors might benefit from a discount rate on future equity, enhancing potential returns as the company's valuation increases.

Disadvantages of SAFE Notes

SAFE notes present unique benefits to both founders and investors. However, they also carry specific limitations that founders and SAFE investors should seek professional legal and financial advice to understand fully.

Disadvantages for Startups

Equity Control

Using SAFE notes might result in unexpected equity dilution, reducing founders' ownership stake in their business.

Investor Misalignment

Differences in company valuation and equity conversion expectations can emerge, leading to potential conflicts between founders and investors.

Future Fundraising Complexity

Managing several different SAFE notes with varied terms can complicate later funding rounds.

Disadvantages for Investors

Ownership Dilution

Conversion of SAFE notes into equity can dilute an investor's stake, especially with subsequent fundraising rounds.

Valuation Cap Challenges

Valuation caps might not accurately reflect the startup's potential value, especially if its valuation significantly increases.

Indefinite Returns

With maturity dates, the timeline for realising returns on SAFE notes is predictable, which can complicate investment strategies.

Equity Dilution

Converting SAFE notes into company equity can dilute the existing capitalisation table, potentially deterring some investors.

SAFE vs. Convertible Notes

SAFE and convertible notes are both popular methods used by early-stage startups looking to raise pre seed or seed capital from investors. While similar, there are some critical differences in their structure and terms.

SAFE Notes

• Equity-like instruments; no valuation is required.
• Simple and flexible; ideal for fast cost-effective fundraising.
• Convert into equity during future financing.
• No interest or maturity dates, minimising direct financial pressure.

Convertible Notes

• Convertible notes work as debt instruments that convert to equity later.
• Convertible securities are generally more complex, with potentially higher legal costs.
• Have interest rates and maturity dates, increasing structure.
• Offer more protections to investors, like liquidation preferences.

How to Issue a SAFE Note: Step-by-Step Guide

1. Consult Legal Advisors

Imagine your Fintech startup (structured as an LLC) is looking to raise $100,000 Pre seed funding. Although not always necessary, you should ideally consult a law firm that specialises in startup finances and understands the nuances of your industry. They'll help you kick off the SAFE note issuance process by drafting a document tailored to your situation.

2. Define Key Terms

You and your legal team determine critical terms for the SAFE note. In our example, let’s imagine you opt for a $3 million valuation cap, and a 25% discount rate. It is obviously important to ensure these terms are attractive to investors while protecting your startup's future growth potential.

3. Draft the SAFE Note Agreement

Draft the SAFE note with legal guidance to include your chosen terms alongside the specified conversion or trigger event, such as an equity financing round of at least $1 million. You might also consider including milestones that, when achieved, adjust the valuation cap or discount rate.

For a practical starting point, we suggest utilising the SAFE Note template provided by Kindrik Partners.

4. Present the SAFE Note to your Investor

Offer this SAFE note to your potential investors such as angel investors, venture capital firms, or a venture studio. Naturally this needs to accompany a detailed overview of your business and growth strategy, usually in the form of a pitch deck—VCs and other investors must understand the investment vehicle and the vision they're investing in.

5. Execute the Agreement

Assuming your investor is happy with the terms you have presented, you would solidify this through a formal SAFE Note agreement and distribute the signed document to all parties to keep for their records.

6. Equity Conversion

Now let’s imagine 12 months later your startup raises a $1m Seed round of funding at a pre-money valuation of $5m from new investors. This causes an equity conversion to be triggered, as the capital raise meets the $1m trigger event.

To determine the valuation at which the SAFE note will convert at we take the lower of:

1. The discounted valuation; the seed round valuation of $5m less the 25% discount, which is $3.75m.
2. The valuation cap; which was $3m.

In this case the valuation cap of $3m is less than the 25% discount on the pre seed valuation of $5m, so this valuation will be used to determine the conversion value. This means the $100,000 SAFE note will be converted to the relevant number of shares at a $3m pre-money valuation.

The SAFE note would convert first, so the $3m pre-money valuation would become a $3.1m post-money valuation. The SAFE note investor would therefore get 3.23% of the company, this is calculated as $100k/$3.1m.

After the SAFE note has converted, the new seed investment capital would come in causing the SAFE note investor to take part in the equity dilution. The new investors would be investing in a $5m pre-money valuation which would become a $6m post-money valuation. For their $1m investment they would get 16.7% of the company, this calculated as $1m/$6m.

The Future of SAFE Notes in Startup Financing

Adoption

While SAFE notes are very common in Silicon Valley and more mature startup ecosystems they are not as common in New Zealand and Australia yet. We anticipate that SAFE notes will continue to gain traction in Australasia as our startup ecosystem matures. Their appeal lies in their simplicity and the benefits they afford both parties which is crucial for the tech sector which needs to prioritise speed and innovation.

Evolution

SAFE notes will likely continue to evolve. We expect to see new types of SAFE notes that address the changing needs of startups and investors alike, potentially incorporating more standardised terms and offering nuanced investor protections.

Alternatives

SAFE notes will likely inspire the creation of new financial instruments. These alternatives could refine or redefine the terms of engagement between startups and investors, providing more tailored solutions to industry-specific challenges. It will be interesting to see Blockchain technology's impact on startup fundraising.

Continued Relevance

At their core, SAFE notes embody the principles of flexibility, efficiency, and alignment of interests. These qualities are highly valued in the startup ecosystem and are likely to ensure their continued popularity and relevance.

Key Article Takeaways

SAFE notes have become an important funding tool, especially for early-stage companies. They protect startup founders from premature equity dilution and avoid having to value a business on day 0. They also provide an efficient mechanism for investors to invest in high return opportunities without upfront negotiation on valuation.

Read some key takeaways from this article:

• SAFE notes are legal instruments used in seed-stage financings that give investors the right to convert their investments into equity at a later date.
• SAFE notes offer advantages for startups, such as flexibility, streamlined processes, and no interest or maturity date. They also offer discounted equity and potential preference during asset distribution for investors.
• While SAFE notes have risks and limitations, conducting thorough due diligence and seeking professional advice can help mitigate potential drawbacks.
• SAFE notes differ from traditional convertible notes regarding interest payments, repayment, company valuation, and debt versus equity representation.
• The future of SAFE notes in startup financing looks promising due to their simplicity, flexibility, and investor-friendly features.

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In the last decade, New Zealand's tech startup ecosystem has experienced an extraordinary surge. Venture capital (VC) firms have emerged as instrumental partners, reshaping the trajectory of technology startups and propelling them toward significant valuations and IPOs on the NZX and beyond.

However, despite an abundance of VC firms eager to invest in innovative and forward-thinking startups, information on New Zealand's venture capital and angel investment landscape remains elusive, scattered, and outdated—with crucial insights hidden behind paywalls.

In this article, we present a comprehensive guide, shining a spotlight on the top VC players that are actively supporting and fuelling the growth of technology startups in Aotearoa in 2024.

Aera VC

• Stage: Seed, Series A, Series B
• Focus: Climate & Sustainability, Deep Tech
• Notable Investments: Solugen, 54Gene, Aqua Cultured Foods
• Location: Auckland (NZ), Singapore
• Website: aera.vc

Aera VC stands at the forefront of deep technology and sustainability investments, propelling the world towards a brighter future. They proactively identify and support visionary founders and teams dedicated to addressing pressing global challenges like climate change. With a VC fund that has a global network and unwavering commitment to positive change, Aera VC positions themselves as an exceptional partner for early-stage ventures tech startup companies striving to make a meaningful impact on a global scale.

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AirTree Ventures

• Stage: Seed, Series A, Series B
• Focus: Technology, SaaS
• Notable Investments: Canva, Linktree, Employment Hero
• Location: Sydney (Australia)
• Website: airtree.vc

AirTree is driven by a mission to provide unwavering support to Australian and New Zealand founders from the very beginning, firmly believing in their audacious visions. As dedicated long-term partners, AirTree Ventures goes beyond funding; they actively assist portfolio companies in essential recruitment endeavours, offering expert guidance on organisation design, employee experience, and compensation strategies. Additionally, founders gain access to a valuable network of experienced individuals who understand the intricacies of scaling startups.

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Blackbird Ventures

• Stage: Pre-Seed, Seed, Series A, Series B, Growth, IPO
• Focus: Technology
• Notable Investments: Canva, Zoox, SafetyCulture
• Location: Melbourne (Australia), Sydney (Australia), Auckland (NZ)
• Website: blackbird.vc

Blackbird Ventures, one of the largest and most active venture capital funds in Australia, focuses on supporting ambitious startups with a vision for global impact. They target technology companies that have the potential to generate over $100 million in annual revenue and have a strong track record of success. With a discerning eye for tech-driven startups with a lean capital requirement and high potential for rapid scaling, Blackbird Ventures commits to supporting founders from inception. They provide an exhaustive suite of resources, networking platforms, and programs to enhance startup success. Though they often lead investment rounds, they're also open to co-investment with other venture capitalists and making initial investments alongside angel investors through their angel networks.

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GD1

• Stage: Pre-Seed, Seed, Series A
• Focus: Deep Tech, SaaS, Hardware, Connected Hardware, Healthtech, Web3
• Notable Investments: Foundry Lab, Zenno, Orbica, Dawn Aerospace, Auror
• Location: Auckland (NZ)
• Website: gd1.vc

GD1 (Global From Day One) is a VC firm that adopts a "bottom-up" approach, supporting exceptional insights-driven, science and engineering-anchored New Zealand companies within Aotearoa’s vibrant, diverse tech ecosystem. GD1 boasts a globally experienced team (ex-founders, operators, engineers, and investors). Their portfolio companies gain access to leading global technology hubs and extensive connections to support market entry on a global scale. GD1 also provides comprehensive support from in-house advisory experts specialising in various aspects of the growth journey, from capital raising to go-to-market strategy and operational excellence.

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Hillfarrance

• Stage: Pre-Seed, Seed
• Focus: Gaming, Software, AI & Machine Learning, Climate Change
• Notable Investments: Scannable, Partly, In Game Collectibles
• Location: Auckland (NZ)
• Website: hillfarrance.com

Hillfarrance is an early-stage VC firm that invests in audacious Kiwi founders driving innovations in media, gaming, artificial intelligence, and climate change. With a strong emphasis on the pre-seed and seed funding stages, Hillfarrance provides invaluable support through connections, networking, and operational expertise. Setting themselves apart, they allocate 20% of their returns to portfolio company founders, fostering a collaborative environment and shared success. Additionally, they offer assistance in areas like connections, business development, human resources, and founder/co-founder well-being support.

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Icehouse Ventures

• Stage: Pre-Seed, Seed, Series A, Series B, Series C
• Focus: Sector Agnostic
• Notable Investments: Halter, FirstAML, Hnry, Sharesies, Caruso
• Location: Auckland (NZ)
• Website: icehouseventures.co.nz

Icehouse Ventures is a VC firm dedicated to supporting brave Kiwi entrepreneurs in their journey to build global companies from New Zealand. Icehouse Ventures looks for founders with unique insights and deep domain expertise, aiming to build industry-disrupting global companies, particularly in the tech sector. They have a team of experienced advisors and investors who are committed to providing guidance and helping innovative businesses grow and thrive—with a specialised community, called First Cut, for founders under 30. Their portfolio companies gain access to a wide network of resources, including other portfolio companies and investors, for talent acquisition, guidance, follow-on capital, and valuable insights to help their company thrive.

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Movac

• Stage: Pre-Seed, Seed, Series A, Series B, Series C
• Focus: Medical Devices, SaaS, Deep Tech, Healthcare, Aerospace
• Notable Investments: Vend, TradeMe, Mint Innovation, Dawn Aerospace
• Location: Auckland, Wellington (NZ)
• Website: movac.co.nz

Movac stands as one of New Zealand's most experienced technology investors, having actively supported Kiwi entrepreneurs since 1998. Their mission centres around tackling challenging problems in large markets, providing comprehensive support to tech teams throughout their entire journey. With a wealth of functional expertise, global connections, and extensive experience in commercialising and growing businesses, Movac is dedicated to empowering startups to reach their full potential.

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NZ Growth Capital Partners

• Stage: Pre-Seed, Seed, Series A, Series B
• Focus: Technology, Healthcare, Clean Energy
• Notable Investments: LanzaTech, Narative, Kami
• Location: Auckland (NZ), Wellington (NZ)
• Website: nzgcp.co.nz

NZ Growth Capital Partners (NZGCP) is a government-owned investment firm dedicated to supporting innovative and high-growth businesses and driving innovation in New Zealand's entrepreneurial ecosystem. With a commitment to fostering economic growth, they provide patient capital and strategic guidance to help companies realise their growth potential. NZGCP offers tailored investment funds for different stages of a company's development. Through their impactful investments, NZGCP plays a pivotal role in fuelling economic growth and propelling New Zealand's innovation landscape forward.

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Outset Ventures

• Stage: Pre-Seed, Seed, Series A
• Focus: Deep Technology (Energy, Hardware, Biotech, Aerospace, Advanced Materials)
• Notable Investments: Open Star, Dennison Technologies, Vertus Energy
• Location: Auckland (NZ)
• Website: outset.ventures

Outset Ventures is a dynamic venture capital firm and deep technology incubator specialising in specialising in early-stage founder-led science and engineering startups. They are the only New Zealand based deep technology investors with an in-house laboratory and workshop facilities. Their experienced team and investment committee bring capital, a vast network, and industry expertise to help their portfolio companies thrive.

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Pacific Channel  

• Stage: Seed, Series A, Series B
• Focus: Climate & Sustainability, Automation, Food & Beverage, Industrial, Deep Tech
• Notable Investments: Tasmanion, Geo40, CropX
• Location: Auckland (NZ)
• Website: pacificchannel.com

Pacific Channel is a New Zealand-based venture capital firm dedicated to supporting groundbreaking science and advanced engineering deep tech companies that address significant global challenges. With a thematic focus on improving quality of life, future of food, sustainable economy, and automation, they provide capital, expertise, and networks to companies at various growth stages. Pacific Channel's portfolio reflects their commitment to solving complex problems and driving positive change for a better future.

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Phase One Ventures

• Stage: Pre-Seed, Seed
• Focus: SaaS
• Notable Investments: Cotiss, Sugar Wallet, EasyRent
• Location: Auckland (NZ)
• Website: phaseone.ventures

Phase One Ventures is not just a venture capital fund. It's a community of early-stage company founders, a product and growth incubator program, and a committed supporter of the next generation of innovative New Zealand businesses. With a vision of creating a thriving and vibrant startup community, Phase One Ventures helps founders achieve product market fit, crystallise their vision, and identify growth engines. They provide pro bono support through mentorship, expert sessions, social catchups, and bi-weekly office hours, while also providing investment opportunities to companies that demonstrate significant progress.

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Punakaiki Fund

• Stage: Seed, Series A, Series B
• Focus: Technology, SaaS
• Notable Investments: Whip Around, Vend, Timely, Couchdrop
• Location: Auckland (NZ)
• Website: https://punakaikifund.co.nz/

Punakaiki Fund is one of New Zealand's original and most prominent venture capital firms, known for its early-stage venture investments with high growth potential. Founded in 2013, they offer more than just funding, providing mentorship to support startup success. While Punakaiki Fund has a wide investment mandate and seeks a diversified portfolio, they find B2B SaaS business models particularly attractive and have a strong track record in this space with notable investments in Vend, Timely, Moxion and Linewize. They have a strong Socially Responsible Investment Policy that precludes them from investing in certain sectors and high emissions industries (including crypto). With their experienced team and vast international network of advisors, investors and business owners/founders, Punakaiki Fund continues to make a significant impact on the thriving New Zealand startup ecosystem.

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Sparkbox Venture Group

• Stage: Pre-Seed, Seed, Series A
• Focus: SaaS, Diagnostic Technology, Communication
• Notable Investments: Xero, Mish Guru, Auror
• Location: Auckland (NZ)
• Website: sparkboxventures.com

Sparkbox Venture Group is a prominent investor in high-growth technology companies throughout the Asia-Pacific region. Their funding programs, including GD1 Seed, GD1 Fund II, and Sparkbox Investments, cater to startups at different stages of development. With a diverse portfolio of innovative companies, Sparkbox Venture Group is an active investor, supporting and nurturing startups and playing a pivotal role in driving their growth and success. Their expertise and financial backing have created valuable partnerships for ambitious entrepreneurs in New Zealand and beyond.

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WNT Ventures

• Stage: Seed, Series A
• Focus: AgriTech, Artificial Intelligence, Automation, Engineering, Sustainability
• Notable Investments: Mastaplex, CarbonCrop, FoundryLab, Mint Innovation
• Location: Tauranga (NZ)
• Website: wntventures.co.nz

WNT Ventures is a venture capital firm that invests in ambitious deep tech founders. They provide high conviction support, connecting founders to resources, expertise, and support to build global businesses. WNT Ventures is dedicated to advancing deep technology as one of New Zealand's fastest-growing and highest-value creation sectors. They seek pre-revenue tech companies with defensible intellectual property serving global markets. In addition to capital, WNT Ventures offers hands-on support through pre-incubation funding grants, incubation programs, and valuable resources.

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Summary

New Zealand's startup scene is thriving, with unprecedented growth and investment opportunities a range of potential investors. The government's commitment to fostering entrepreneurship and the increased availability of early-stage investment make it an ideal destination for tech startups.

Remember, the journey to raising capital is not just about the money or reaching a particular valuation in your seed round—it's crucial to find partner(s) and shareholders who also share your vision and can provide the support you need to succeed. Taking care in due diligence to gain the right support can pay dividends, allowing you to navigate the entrepreneurial journey and make a lasting impact on the world.

If you're a tech startup (or a small business with ambitious goals) in New Zealand, connect with the venture capital firms mentioned in this article, present your ideas, and unleash the potential of your business!

New Zealand tech startups can access arange of grants and support services beyond venture capital, such as through Callaghan Innovation. NZTE also has resources for if your business plan is to raise capital. Alternative funding methods (such as via private equity, crowdfunding, or with a venture studio) may be helpful to explore.

Looking for Aussie startup fundraising opportunities, such as Square Peg Capital in New South Wales or Startmate in Victoria? View Australia’s Top Venture Capital Firms For Tech Startups [2024].

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