What is a SAFE in venture capital?
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A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.
How does a SAFE work? A SAFE is a Simple Agreement for Future equity and is a legal contract between an investor and a startup company. The contract gives the investor the right to purchase equity in the company at a later date, usually when the company raises additional funding or is acquired.
In recent years, SAFEs have become the most common convertible instrument due to their relative simplicity. Like convertible notes, SAFEs convert into stock in a future priced round. Unlike convertible notes, they are not debt and do not require the company to pay back the investment with interest.
No, a SAFE note is not a loan or debt, it is accounted for an equity on the balance sheet. Unlike convertible debt - or pretty much any debt, it does not have an interest rate nor does it have a maturity date.
A Simple Agreement for Future Equity (SAFE) is a contractual agreement between a startup company and its investors. It exchanges the investor's investment for the right to preferred shares in the startup company when the company raises a future round of funding.
The SAFE is an investment document that is not a debt instrument, but rather appears on the company's capitalization table like other convertible securities such as options.
A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.
Under a SAFE, the investor gives the company cash on signing the agreement, and the investor gets the right to receive equity in the future, usually when the company goes through its next round of funding. The terms of the SAFE investor's equity are determined by the triggering round of funding.
SAFE Note Example
For example, an investor purchases a SAFE note from your startup with a valuation cap of $10M. Your company's value is set at $20M at $10/share during the subsequent funding round. The SAFE note will convert based on the valuation cap of $10M.
What is a SAFE vs equity?
The term “equity” refers to ownership in a business that is typically expressed as a percentage of the total shares of a company. A SAFE is a legal contract that gives the investor the right to purchase equity in the future.
Lack Of Interest Payments: Unlike debt instruments, SAFE notes don't typically offer interest payments, which could be a disadvantage for investors seeking immediate returns. Investor Risk: In the case of a successful startup, investors might end up with a smaller equity stake compared to a fixed valuation.
Investors who want to set up a prime negotiating opportunity may utilize a SAFE note. That's because SAFE notes convert to preferred stock typically with a discounted price. With a high valuation cap, the investor could receive five to 10 times their invested amount compared.
SAFEs do not represent current equity stakes in the company, and so do not provide you with voting rights similar to common stock. But there may be particular circ*mstances mentioned in the SAFE that allow you a voice on matters pertaining to your SAFE.
A valuation cap in a SAFE sets the maximum value in equity you can get in the agreement. If the company's valuation when a triggering event (like a funding round) occurs is more than the cap, then your SAFE is converted using the valuation cap's value. This can result in you receiving more shares.
There is growing academic and policy interest in so called “safe assets”, that is assets that have stable nominal payoffs, are highly liquid and carry minimal credit risk.
—SAFEs are founder-friendly and impose no obligation on the founders to repay the investment if the SAFE never converts into security. While this can be seen as a negative as the investors could be left with nothing, most professional seed stage investors understand the risks of investing in early-stage startups.
Second, safe assets are short-term assets such as bank deposits whereas risky assets are long- term assets such as equities.
A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.
A SAFE is an investment contract between a start-up and an investor that gives the investor the right to receive equity of the company on certain triggering events, such as a: ⦿ Future equity financing (known as a Next Equity Financing or Qualified Financing), usually led by an institutional venture capital (VC) fund.
Is a SAFE a derivative?
Because a SAFE doesn't have terms typical of a debt instrument and instead represents a deal to issue equity to the investor at a future date, it is typically treated as equity (or an equity derivative) for tax purposes.
Safe assets refer to low-risk assets that can weather market volatility. The word itself justifies what safe asset means. Safe assets have stable nominal payoffs, high liquidity and carry minimal credit risk.
A SAFE has no accruing interest. No Maturity date. This is the date on which the issuer of a debt instrument may be obligated to repay the original investment amount and any accruing interest. A SAFE does not have a maturity date.
Important key terms of SAFE notes
Valuation cap – A valuation cap is a limit on how much a SAFE can be converted to equity ownership in the future. It's the maximum price at which an investor can convert a SAFE to stock: a predetermined amount that “caps” the conversion price once shares are issued.
Scrum: What's the difference? Scrum is a simple, flexible approach to adopting Agile that's great for small teams. SAFe is an enterprise-wide Agile framework designed to help bring Agile beyond the team and into the company as a whole.
