Better SAFE Than Sorry: Combating Volatile Tech Valuations With Future Equity Agreements

Start-up valuations are under pressure in late 2022. Both companies and investors are increasingly struggling to finance business models that rely on external financing. Where the challenge of closing a financing round is already having a negative effect on the business, so-called future equity agreements offer an interesting solution. These future equity investments are paid immediately but are only converted into shares in a later financing round, often saving companies from running out of financial runway.

The music is slowing

After years of steadily rising start-up valuations, the rally recently took a pause. Start-ups are now facing difficulties raising financing rounds while their cash burn remains high. Many businesses that require frequent financing rounds as competition often requires hypergrowth and burning cash at an ever-rising pace. Raising more money upfront would often dilute founders below a level where they can be expected to have enough "skin in