Should your startup opt for SAFEs or convertible notes on your next funding round? This Houston expert weighs in. Photo via Getty Images

As both a founder and occasional early-stage investor in the Houston ecosystem, I've seen firsthand the opportunities and challenges surrounding seed funding for local startups. This critical first fundraising round sets the trajectory, but navigating the landscape can be tricky, especially for first time founders who may not be familiar with the lingo.

One key dynamic is choosing the right deal structure — SAFEs (Simple Agreement for Future Equity) vs. convertible notes are the most common vehicles early stage startups use to raise capital and are far more founder-friendly than a priced round.

Let's start first with what the have in common:

  • Both allow you to defer setting a valuation for your company until a later (likely priced) round, which is useful in early stages or pre-revenue companies
  • Both are cheaper and faster to execute than a priced round, which cash-strapped early stage founders like
  • Both can have terms like valuation cap, discount, conversion event, and pro rata rights.
  • Both are less attractive to investors seeking immediate equity (especially important if starting the QSBS clock is part of your investors strategy or if the investor is newer to startup investing)
  • Both can create messy cap tables and the potential for a lot of dilution for the founders (and investors) if they are used for multiple raises (especially with different terms)

While as you can see they have similarities, they have some important differences. Let's dig in on these next:

SAFEs:

  • Created by Y Combinator in 2013, the intent was to create a simplified, founder friendly agreement as an alternative to the convertible note
  • Is an agreement for future equity for the investor at a conversion event (priced round or liquidation event) which converts automatically.
  • It's not a debt instrument and does not accrue interest or have a maturity date.
  • Generally have much lower upfront legal costs and faster to execute

Convertible Notes:

  • A debt agreement that converts to equity at a later date (or conversion event like a priced round)
  • Accrues interest (usually 2 to 8 percent) and has a maturity date by which the note must either be repaid or convert to equity. If you reach your maturity date before raising a qualifying round, you can often renegotiate to extend the maturity date or convert the note, though be prepared to agree to higher interest rates, additional warrants, or more favorable conversion terms.
  • More complex and take longer to finalize due to non-standard terms resulting in higher legal and administrative costs

It's worth reiterating that in both cases, raising multiple rounds can lead to headaches in the form of complex cap tables, lots of dilution, and higher legal expenses to determine conversion terms. If your rounds have different terms on discounts and valuation caps (likely) it can cause confusion around equity and cap table structure, and leave you (the founder) not sure how much equity you will have until the conversion occurs.

In my last startup, our legal counsel — one of the big dogs in this space for what it's worth — strongly advised us to only do one SAFE round to prevent this.

Why do some investors tend to prefer convertible notes?

There are a few reasons why some investors, particularly angel investors from developing startup ecosystems (like Houston), prefer convertible notes to SAFEs.

  • Because they are structured as debt, note holders have a higher priority than equity investors in recovering their investment if the company fails or is liquidated. This means they would get paid after other creditors (like loans or credit cards) but before equity investors, increasing the likelihood of getting some of their money back.
  • The interest terms protect investors if the founder takes a long time to raise a priced funding round. As time passes, interest accumulates, increasing the investor's potential return. This usually results in the investor receiving a larger equity stake when the note converts. However, if the investor chooses to call in the note instead, the accrued interest would increase the amount of money owed, similar to a traditional loan
  • More defined conversion triggers (including a maturity date) gives investors more control and transparency on when and how their investment will convert.
  • Can negotiate more favorable terms than the standard SAFE agreement, including having both a valuation cap and a discount (uncommon on a SAFE, which usually only has one or the other), interest rates, and amendment clauses to protect them from term revisions on earlier investors by future investors (called a cram-down), etc.
We'll go over what the various terms in these agreements are and what to look out for in a future article

How to choose:

  • Consider your startup's stage and valuation certainty — really uncertain or super early? Either of these instruments are preferable to a priced round as you can defer the valuation discussion
  • Assess investor preferences in your network — often the deciding factor if you don't have a lot of leverage; most local angels prefer c-notes because they see them as less risky though SAFEs are becoming more common with investors in tech hubs like Silicon Valley
  • Evaluate your timeline and budget for legal costs — as I mentioned, SAFEs are way less expensive to execute (though still be prepared to spend some cash).
  • Align the vehicle with your specific goals and growth trajectory

There's no one-size-fits-all solution, so it's crucial to weigh these factors carefully.

The meanings of these round terms like "seed" are flexible, and the average seed funding amount has increased significantly over the past decade, reaching $3.5 million as of January 2024. This trend underscores the importance of choosing the right funding vehicle and approach.

Looking ahead, I'm bullish on Houston's growing startup ecosystem flourishing further. Expect more capital formation from recycled wins, especially once recently minted unicorns like High Radius, Cart.com, Solugen, and Axiom Space exit and infuse the ecosystem with fresh and hungry angels, new platforms beyond traditional venture models, and evolving founder demographics bringing fresh perspectives.

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Adrianne Stone is the principal product manager at Big Cartel and the founder of Bayou City Startups, a monthly happy hour organizer. This article original ran on LinkedIn.

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Texas plugs in among states at highest risk for summer power outages in 2025

hot, hot, hot

Warning: Houston could be in for an especially uncomfortable summer.

A new study from solar energy company Wolf River Electric puts Texas at No. 2 among the states most at risk for power outages this summer. Michigan tops the list.

Wolf River Electric analyzed the number of large-scale outages that left more than 5,000 utility customers, including homes, stores and schools, without summertime electricity from 2019 to 2023. During that period, Texas experienced 7,164 summertime power outages.

Despite Michigan being hit with more summertime outages, Texas led the list of states with the most hours of summertime power outages — an annual average of 35,440. That works out to 1,477 days. “This means power cuts in Texas tend to last longer, making summer especially tough for residents and businesses,” the study says.

The Electric Reliability Council of Texas (ERCOT), which operates the electric grid serving 90 percent of the state, predicts its system will set a monthly record for peak demand this August — 85,759 megawatts. That would exceed the current record of 85,508 megawatts, dating back to August 2023.

In 2025, natural gas will account for 37.7 percent of ERCOT’s summertime power-generating capacity, followed by wind (22.9 percent) and solar (19 percent), according to an ERCOT fact sheet.

This year, ERCOT expects four months to surpass peak demand of 80,000 megawatts:

  • June 2025 — 82,243 megawatts
  • July 2025 — 84,103 megawatts
  • August 2025 — 85,759 megawatts
  • September 2025 — 80,773 megawatts

One megawatt is enough power to serve about 250 residential customers amid peak demand, according to ERCOT. Using that figure, the projected peak of 85,759 megawatts in August would supply enough power to serve more than 21.4 million residential customers in Texas.

Data centers, artificial intelligence and population growth are driving up power demand in Texas, straining the ERCOT grid. In January, ERCOT laid out a nearly $33 billion plan to boost power transmission capabilities in its service area.

Houston ranks among top 5 cities for corporate HQ relocations in new report

h-town HQ

The Houston area already holds the title as the country’s third biggest metro hub for Fortune 500 headquarters, behind the New York City and Chicago areas. Now, Houston can tout another HQ accolade: It’s in a fourth-place tie with the Phoenix area for the most corporate headquarters relocations from 2018 to 2024.

During that period, the Houston and Phoenix areas each attracted 31 corporate headquarters, according to new research from commercial real estate services company CBRE. CBRE’s list encompasses public announcements from companies across various sizes and industries about relocating their corporate headquarters within the U.S.

Of the markets included in CBRE’s study, Dallas ranked first for corporate relocations (100) from 2018 to 2024. It’s followed by Austin (81), Nashville (35), Houston and Phoenix (31 each), and Denver (23).

According to CBRE, reasons cited by companies for moving their headquarters include:

  • Access to lower taxes
  • Availability of tax incentives
  • Proximity to key markets
  • Ability to support hybrid work

“Corporations now view headquarters locations as strategic assets, allowing for adaptability and faster reaction to market changes,” said CBRE.

Among the high-profile companies that moved their headquarters to the Houston area from 2018 to 2024 are:

  • Chevron
  • ExxonMobil
  • Hewlett-Packard Enterprise
  • Murphy Oil

Many companies that have shifted their headquarters to the Houston area, such as Chevron, are in the energy sector.

“Chevron’s decision to relocate its headquarters underscores the compelling advantages that position Houston as the prime destination for leading energy companies today and for the future,” Steve Kean, president and CEO of the Greater Houston Partnership, said in 2024. “With deep roots in our region, Chevron is a key player in establishing Houston as a global energy leader. This move will further enhance those efforts.”

According to CBRE, California (particularly the San Francisco Bay and Los Angeles areas) lost the most corporate HQs in 2024, with 17 companies announcing relocations—12 of them to Texas. Also last year, Texas gained nearly half of all state-to-state relocations.

In March, Site Selection magazine awarded Texas its 2024 Governor’s Cup, resulting in 13 consecutive wins for the state with the most corporate relocations and expansions.

In a news release promoting the latest Governor’s Cup victory, Gov. Greg Abbott hailed Texas as “the headquarters of headquarters.”

“Texas partners with the businesses that come to our great state to grow,” Abbott said. “When businesses succeed, Texas succeeds.”

CBRE explained that the trend of corporate HQ relocations reflects the desire of companies to seek new environments to support their goals and workforce needs.

“Ultimately, companies are seeking to establish themselves in locations with potential for long-term success and profitability,” CBRE said.

SpaceX test rocket explodes in Texas, but no injuries reported

SpaceX Update

A SpaceX rocket being tested in Texas exploded Wednesday night, sending a dramatic fireball high into the sky.

The company said the Starship “experienced a major anomaly” at about 11 pm while on the test stand preparing for the 10th flight test at Starbase, SpaceX’s launch site at the southern tip of Texas.

“A safety clear area around the site was maintained throughout the operation and all personnel are safe and accounted for,” SpaceX said in a statement on the social platform X.

CEO Elon Musk ’s SpaceX said there were no hazards to nearby communities. It asked people not to try to approach the site.

The company said it is working with local officials to respond to the explosion.

The explosion comes on the heels of an out-of-control Starship test flight in late May, which tumbled out of control. The FAA demanded an investigation into the accident.