In every angel deal there is a choice, even if most of the time nobody names it. Do you back the company on a SAFE, or do you do a fixed-price equity round? Most treat this as a paperwork question or maybe even a valuation question, when really, it’s all about governance. And it turns out, governance is a grey scale.

At one end of the scale is the only governance that is truly essential: the company exists. It is incorporated, it has a constitution, someone is a director, the shares are real. At the other end is the full apparatus of a priced round. Founder vesting, a negotiated board, investor veto rights, an option pool carved out to the last percent, and a shareholders’ agreement that runs to forty pages. The SAFE and the priced deal are two points on that scale. Don’t ask which instrument is better in the abstract. Be more concerned about how far up the scale this particular deal needs you to go.

Most of the time, my own answer is: not very far. But I want to walk through why, because the reasoning matters more than the conclusion, and because plenty of seasoned angels land in a different place for reasons that are not silly.

The two camps

To be fair, angels split on this, and they split partly on principle.

One camp likes the fixed-price round. There is a real appeal to it. You get a known cap table, a share certificate, a price. You are a shareholder from day one, on the same footing as everyone else on the register. There is no cap-and-discount arithmetic to reason about later, and no conversion event hanging in the future. For an investor who wants to know exactly what they own the day the money leaves the account, a priced round delivers a kind of certainty the SAFE defers.

The other camp reaches for the SAFE precisely to defer. The same complexity a priced round front-loads, the SAFE pushes down the road to a point where it can be handled properly. Both positions are defensible. The disagreement is real, and some of it is temperamental rather than analytical. I have my preference, but I do not think the other camp is making a mistake so much as pricing the certainty a way different to myself.

A set definition of a term sheet

Before going further, it helps to be clear about the document at the centre of a priced round, because the phrase “term sheet” is one of the most misused in the ecosystem. It also helps to be clear on one structural fact: the company is responsible for producing the deal documents, not the investor. That is as it should be; it’s their raise and their cap table. On the downside, this means the documents are only ever as good, and as fast, as the lawyer the company can afford. There are excellent specialist startup lawyers in the market, and plenty of companies engage one. But an early-stage company with almost no money often engages whoever is cheap or already known to them, which is often a suburban generalist rather than a specialist. That shapes everything that follows.

With that in mind, there are three distinct confusions about the term sheet itself.

The first is about status. A term sheet is, almost entirely, non-binding. It is an agreement to try to agree. The clauses that bite are usually the no-shop (exclusivity for a period) and confidentiality. Everything else (valuation, board, vesting) is an expression of intent and not a commitment. You will still hear people say “we’ve signed the term sheet” as though the money has moved and the deal is done. It has not, and it is not.

The second confusion is about the artefact itself. Reaching for a term sheet at all, on a small angel cheque, is often a tell. It means someone is trying to run a venture-capital process on angel money. The term sheet is the instrument for negotiating a priced round. The whole point of a SAFE is that you do not need one. It is worth knowing that these documents are not proprietary or mysterious: AirTree’s Open Source VC library publishes the whole standard set openly, including term sheet, shareholders’ agreement, SAFE, convertible note, and ESOP. It has become the industry-standard reference for early-stage deals in Australia. Their standard term sheet is, in their own words, plain vanilla and straight up the fairway. Read it once and the mystery evaporates, leaving a checklist of governance decisions. All you need to ask is whether this deal needs those decisions made now.

The third confusion is the one that causes the most grief in practice. A term sheet does not arrive on a blank page. It fits over the top of whatever already exists, and what already exists is often a shareholders’ agreement that a suburban lawyer, or an early advisor, has already papered. You are no longer negotiating terms. You are negotiating against a document that was pre-built to protect someone else, before you arrived, by someone who had every reason to embed their client’s position deep in the constitution. That is a very different job, and a much harder one.

The terms you are deciding

If you go up the scale to a priced round, here is the pile you are agreeing to negotiate. Each is a dial, and the priced round turns them all at once, at the moment the business plan is least reliable:

• Founder vesting: the schedule over which founders earn back their own shares. Needs a view on who does what for years, which needs a plan you can believe in.
• The board: composition, seats, who controls it. A priced round pushes a seat at you; my standing view is don’t be a director.
• The option pool: how big the ESOP is and who bears its dilution. Sizing it needs a hiring plan you do not have yet.
• Anti-dilution: protection if a later round prices below yours. Broad-based weighted average is standard and fair; a full ratchet is the aggressive version and a red flag.
• Liquidation preference: who gets paid first, and how many times over, in an exit.
• Information rights: the reporting the company owes you. Easy to ask for, but it obliges a three-person company to produce reports for someone who chose not to sit on the board.
• Drag-along and tag-along: the exit plumbing. For a minority angel these are mostly protective: tag lets you join a sale on the same terms, drag stops a stubborn small holder blocking a good one.
• Pro-rata rights: your option to keep your percentage in the next round.

There’s one more that I usually pull out of the list and keep separate: Investor Veto Rights. It’s the dial that looks like a boilerplate, but it absolutely is not. These are protective provisions giving you consent over issuing new shares, taking on debt, changing the constitution, and selling the company. It’s where real control sits, more than the board seat everyone fixates on. Investor Veto Rights are easy to wave through because they read like standard form, and they are the terms most likely to matter years later when something big happens. If you read one thing on a term sheet closely, read these.

That is a lot to settle for a company that may have changed its mind about half of it within two quarters. It happens more often than you think.

The ten business plans

I once watched a lead investor grind through ten versions of a business plan as part of doing a fixed-price deal. You read that correctly: ten. Each one more polished than the last. The vesting schedule and the option pool both depended on it, so it had to be right.

Here is the thing. Business plans get shredded within months, no matter how well-crafted the plan is. Markets will move and products will change. A channel that looked dead comes alive, and the founders learn something that reorders everything. In my experience the plan that survives first contact intact does not exist. The energy that went into versions two through ten went into precision on a document that was obsolete by the following quarter.

That energy is better spent elsewhere. The old YC line is that the two things that matter early are that one founder builds and one founder sells. Everything else is a distraction from those two drivers. A deal structure that pulls the founders into ten rounds of planning is taxing exactly the people whose attention is the scarcest thing in the company.

Shred, or layer over the top

When the paperwork already exists, and it’s a mess, the company has two options: layer new terms over it or tear it up and start again. Sometimes starting again is the right call. But there is a constraint on how much help we can give, and it is worth being honest about, because it shapes everything.

We represent the buyer. We sit at the investor’s side of the table. That means we cannot give the company legal advice on its own documents. That is their lawyer’s job, and stepping into it is both a conflict and a liability we have no reason to take on.

What we can do is point the company at the standard documents, which are free and public, and run a diff of their existing paperwork against the standard. Some light up like a Christmas tree. Every non-standard clause, every place an earlier advisor has inserted something unusual, shows up in red. AI is a useful tool in this situation. It can flag the deviations in seconds and describe what each one does. We can say, as the buyer, these are the terms that are not standard, and here is what we need to see to invest. What we cannot do is sit on their side and tell them how to fix their own constitution. The line matters.

There is always a bit of a dance around this issue. We state our position, they take it to their lawyer, their lawyer advises them, and the documents move… or not. Where the company has engaged a good startup firm, the dance is quick because their lawyer already knows the standards and can see immediately which of our points are reasonable. Where the company has an inexperienced generalist, it is slow. The charitable read on this is inexperience: someone working carefully through terms they do not see often. The cynical read, and I have seen enough deals to hold it, is that a lawyer paid by the hour to negotiate the best possible deal for their client has no reason to hurry. Either way the clock runs, and the founder pays for it. Worse still is the early advisor with their claws in the shareholders’ agreement, which sometimes does not resolve at all.

This is the part that makes non-standard terms not just unnecessary but expensive. Anything unusual that gets negotiated in at this stage will most likely have to be negotiated back out at the next round. The incoming VC will want standard terms and will make cleaning up the cap table and the constitution a condition of their money. The bespoke clause the founder’s lawyer fought for becomes a bespoke clause the next round’s lawyers have to unwind. A lawyer-fest now, and another lawyer-fest later, to arrive back at the document everyone could have started from. Every clause in a standard document is there for a reason. If someone wants to remove one, the fair question is what they propose to put in its place, why, and whether it is worth paying for twice.

The problem a fund does not have

There is one issue with term sheets that is specific to angel groups, yet most angels have not thought through.

A term sheet carries a soft commitment to invest a stated amount. Non-binding, yes, but a commitment in spirit. A fund can stand behind that number, because a fund has committed capital sitting in the account. An angel group cannot make that same stand. Our money is discretionary and deal-by-deal. I cannot sign a term sheet with my hand on my heart and promise the group will fill the round because I do not control that. The honest position for an angel group is best-endeavours only.

That makes us less competitive than a fund, and the blurring of what a term sheet commits you to does not help. It gets worse at the condition precedent. The whole idea of a term sheet is that the company then goes off and spends real time, real money, and real legal effort turning it into completed documents. You do not want that to fall over at the condition precedent because the angel commitment was never fully there. The founder has burned resources they cannot get back.

The mitigation we use is to cash the commitments up front. Collect the money before signing, so the commitment is real. But that creates its own problem. The deal still has to grind through to completion, and that grind is frequently slow. Meanwhile you are sitting on your investors’ cash. I have seen several deals where we held investor money for far too long, waiting not on a decision but on documents. There is no clean answer. It is a genuine cost of the priced-round path that the SAFE simply does not impose.

Harder than it looks

Once you step back from the individual problems, you can’t ignore the pattern. A fixed-price deal is harder than it looks, and the difficulty lands hardest where there is least capacity to absorb it.

Look at who is usually in the room. The founder is often doing this for the first time, and a priced round asks them to make decisions that feel permanent; vesting, board, control terms. All for a company that barely exists, while also trying to build the thing. It is overwhelming, and the overwhelm falls on the person whose attention the company can least afford to lose.

Their lawyer may be a generalist working through terms they do not see often. And the deal lead, often the angel running the round, may be inexperienced too. A first-time lead on a fixed-price deal is left to negotiate terms they may not fully grasp, against a lawyer who may be running the clock, on a valuation that due diligence can reopen, holding a commitment they cannot really stand behind. There are so many ways to get it wrong, and it is the founder who wears the cost when the lead fails.

Put a green founder, a generalist lawyer and a first-time lead in the same deal and you have the common case, not the worst one. The priced round punishes every bit of that inexperience. The SAFE forgives most of it. That, more than any elegance argument, is why I reach for it.

Where the SAFE sits, and why it is often the right point

The SAFE sits low on the governance scale, and that is the point of it. It defers vesting, board, veto rights, option pool, and that forty-page agreement to the VC round. The entire apparatus moves to where it belongs. By then there is a fund with a fiduciary duty to its own investors, proper early-stage lawyers who want to tidy the deal up, and enough money in play to justify the work. The governance gets done by the people equipped to do it.

Two features make the SAFE elegant for an angel. For starters, a SAFE can close in tranches, which means the building can start the moment the first money is in, rather than waiting for a whole round to assemble. Given that most startups fail, often for lack of progress rather than lack of paperwork, speed to building beats precision in papering almost every time. The second is that the instrument itself is well understood. YC’s post-money SAFE has permeated Australia thoroughly, and the two strongest local accelerators, Startmate and Antler, both use SAFEs as a matter of course. The standard SAFE is a known quantity, and the real value is that a SAFE is safe once you are across the terms.

Being across the terms matters. Here is where my background trading structured equity and derivatives, at BT and later at County NatWest and Citi, does some work. A SAFE should have a cap and a discount. The discount is the smaller part. The value lives in the cap, because the cap is the option. It is what gives you upside exposure to the company outperforming before the next round prices it. An uncapped SAFE hands you no strike on that upside; you are lending money to convert at whatever price the next round sets, with only a discount to show for it. That’s why I do not do uncapped SAFEs. That is my own rule, not a recommendation, but the logic is the same logic of any option: without a cap there is nothing to be long.

I also only use a SAFE where I am confident the company will need another round to succeed, because the SAFE relies on that next round to convert. Pick a company that could quietly become profitable and never raise again, and the instrument works against you. But turn that around and it is reassuring rather than worrying. The outcomes that matter to an angel are the handful of winners that return the whole portfolio, and the winners’ raise; a big outcome at this stage almost always has venture capital involved somewhere along the way, which means the SAFE converts exactly where conversion counts. The company that never triggers a conversion is usually the one that stalled or died, and no instrument was going to rescue that. You are structuring around the winners, not the median. Some of my best investments have been SAFEs, or their close cousin the convertible note. The elegance is not theoretical.

A convention, and both of its edges

The YC SAFE is now a market convention, and that fact cuts two ways.

If you set out to fight it and insist on a priced round where the founder and the market expect a SAFE, you are fighting a convention that has already permeated the ecosystem. That is a losing fight, an expensive one, and it burns the goodwill you will want later. But the same fact runs the other way. If you are frightened of the SAFE, you are frightened of the standard instrument that the best companies use as their default. These are the companies coming through Y Combinator abroad, and through Startmate and Antler here at home. It is no longer new and unusual. It is the convention. You should neither wage war on it nor be scared of it.

A second-order risk, not the main one

So where does that leave the choice? The instrument you pick is a real risk. Get it wrong, badly wrong like an uncapped SAFE or a priced round papered over a poisoned shareholders’ agreement, and it can cost you. But it is a second-order risk.

Lawyers will disagree with some of this (so will some seasoned investors), and they will disagree on principle rather than out of confusion. That’s fair. What I keep coming back to is that companies fail with either approach, and companies succeed with either approach. The building is what decides it. The structure is the frame around the picture, not the picture. As I have argued in High value, low touch, the angel’s instinct to add structure and oversight is usually the instinct to resist, and this is the same instinct wearing a legal hat. And because most startups fail regardless, an arithmetic I set out in Roll the die, the width and quality of your portfolio will swamp the instrument choice on any given deal.

Knowing where on the grey scale a deal belongs is the skill. Insisting on the same end of the scale for every deal is the mistake.

Richard Moore is co-founder of MooCoo Ventures, an angel syndicate that co-invests alongside Brisbane Angels, one of Australia’s most active angel groups. He has made over ninety personal angel investments since 2013.

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