Developed in partnership with law firm Wilson Sonsini Goodrich & Rosati, the D-SAFE is a new mechanism for quickly and seamlessly funding development for climate projects.
Elemental aims to support companies through what we call the “Scale Gap” — between early-stage VC funding and later-stage growth capital, or for the first-through-tenth project deployments — so they can attract later-stage financing. Many of these projects, often needing less than $100M, also have outsized potential for community impact. A white paper published today by Elemental and Boston Consulting Group (BCG) identified this Scale Gap across the industry as $150 billion.
Modeled after Y Combinator’s SAFE, the D-SAFE (Development Simple Agreement for Future Equity) was created by Elemental and Wilson Sonsini Goodrich & Rosati to address a major piece of the Scale Gap: a lack of development capital.
Before building a project — whether it’s an advanced geothermal plant or an EV truck charging depot — entrepreneurs must complete numerous pre-project elements. This development process involves securing permits, project design, budgeting and contracting, community engagement and more — all before implementation can begin.
At this stage, a company may need a small infusion of cash — $1M to $10M typically — to overcome the initial development risks and hurdles before the project is ready for deployment. Investors have shied away from funding development because it is high risk: a lot can change between pre-project planning and when a carbon capture or sustainable aviation fuel facility is up and running. This can range from market fluctuations to new policies and regulations, each of which represents an all-or-nothing hurdle to realizing a project, with the potential for a total loss of investment capital. But these factors may determine whether a project succeeds — and whether investors see returns.
The D-SAFE works to address these gaps, accelerate this process and catalyze more project capital — with the ultimate goal of getting critical climate projects developed, derisked and deployed as quickly as possible.
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What is a D-SAFE and how does it work?
- Modeled after Y Combinator’s SAFE, the D-SAFE is an innovative funding mechanism designed to streamline development funding.
- The D-SAFE includes a redemption clause that allows it to either operate like a loan and get paid back at the company’s option — or a conversion clause where it can convert to equity, like a traditional SAFE at the investors option, making it a more flexible funding source for startups.
- When a D-SAFE is paired with a Development Support Agreement, funders and companies can align early on how the funding will be used and establish milestones to set clear expectations upfront.
- The funding is directed to the parent company, but can be specifically directed to a project. This helps to de-risk the investment for the financier given the potential to convert to equity should the project not come to fruition, creating a low-friction way to finance pre-project activities that attract additional funding without linking outcomes to any sole project and its distinct risk.
Why it works
- Speed & reduced risk: The D-SAFE’s likeness to the SAFE makes it familiar enough to startups, investors and legal teams to move through review and negotiations relatively quickly. Thus, it is a helpful tool to de-risk investments and catalyze funds, while avoiding the outsized legal and financial hurdles of a loan approval process.
- Founder friendly and with aligned incentives: It is advantageous to startups to use debt, grants and other catalytic capital to fund development work, rather than highly dilutive capital like venture equity. The D-SAFE allows startups and funders to align on and share risks and potential rewards. It also allows the founder/CEO to decide whether to pay the funder back (i.e. if the project proceeds to full development and is fully capitalized by project funders), or convert to equity.
- Flexibility: It’s useful to reduce the risk of early climate project investments, while retaining possible rewards for those risks and incentivizing the startup to pay back the D-SAFE. While Elemental’s initial D-SAFEs are catalytic, the D-SAFE can function as market or off-market rate capital depending on the circumstances, with options to customize using creative structures such as agreeing to reduce the cost-of-capital and associated dilution as project and impact milestones are realized.
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D-SAFE case studies
As of June 2024, Elemental has invested with a D-SAFE in eight companies. Our projects with Dimensional Energy and Origen stand out as two examples of how the D-SAFE can play a pivotal role in sparking additional funding for projects.
Dimensional Energy is building a facility to turn captured carbon dioxide and water into sustainable aviation fuel (SAF), as well as carbon-neutral waxes to use in cosmetics, plastics and more.
📍New York
Dimensional was lined up to receive $10M in financing from Seneca Holdings, but in order to become eligible, the company needed to complete key pre-development activities such as undertaking a feasibility study to identify the project’s true costs as well as design and engineering. Elemental’s $500K D-SAFE is covering these costs and unlocking the Seneca Holdings funding, allowing Dimensional to start building in 2024 to produce 200 barrels of SAF daily by 2026.
“It may seem like a small piece of the puzzle, but Elemental’s D-SAFE provided a quick, nimble source of funding for our early development work that was key to unlocking financing from Seneca Holdings. This project will not only accelerate our work to scale a drop-in replacement for aviation fuel — it will fulfill the mission of Seneca Holdings to diversify their portfolio and to generate wealth in Seneca Nation communities for years to come.” — Dimensional Energy CEO Jason Salfi
Origen’s innovative technology enables the production of zero-carbon lime that unlocks multiple pathways to carbon removal, while also decarbonizing hard-to-abate emissions in the lime sector.
📍Southeast U.S.
Origen will be building their first commercial facility as part of the Louisiana DAC Hub (Direct Air Capture) project. To jumpstart this commercial facility, Elemental’s $500K D-SAFE will fund Origen’s development expenses including design and engineering studies, legal contracts and community engagement work. The facility will begin operations in H2 2028, and will accelerate deployment of a 50 kiloton-per-year system in order to enable expansion to 1+ megaton-per-year capacity at this hub. For comparison, capturing 1 megaton of CO₂ is equivalent to taking approximately 217,000 passenger vehicles off the road for a year.
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What’s next?
The $150B Scale Gap in climate financing requires capital to move in creative ways to build the bridge from venture capital to commercial finance. We welcome your feedback as we continue to innovate around this gap.
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