A SAFE, also known as Simple Agreement for Future Equity, is a legal contract that companies, usually startups, use to raise capital. SAFEs, similar to warrants, delay the company’s valuation until a future date while providing the investor with the opportunity to invest or the company to raise capital.
Introduced in 2013 as a simple replacement for convertible notes, a SAFE gives the investor the right to receive equity of the company on certain triggering events, such as future equity financing or sale of the company.
Using a SAFE, the investor invests money in the company and, in exchange for the money, the investor receives the right to purchase stock in a future equity round subject to certain parameters set out in the SAFE.
FEATURES OF SAFEs
SAFEs commonly have the following features:
- No maturity date until a conversion event occurs;
- SAFEs remain outstanding indefinitely;
- No interest rate;
- No accruing interest – investors receive only a right to convert their SAFEs into equity at a lower price than the investors in the subsequent financing (based either on the discount or valuation cap in their SAFEs);
- Automatic conversion on any priced shares issue; and,
- A valuation cap – i.e. the maximum value to which the SAFE will convert.
BENEFITS OF SAFEs
SAFEs offer several fundamental benefits that are critical important for startups and young companies:
- As a flexible, one-document security without numerous terms to negotiate, SAFEs save companies and investors money in legal fees and reduce the time spent negotiating the terms of the investment.
- Companies and investors will usually only have to negotiate one item: the valuation cap.
- Because a SAFE has no expiration or maturity date, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like.
- A SAFE allows for high resolution fundraising.
- Companies can close with an investor as soon as both parties are ready to sign and the investor is ready to invest money, instead of trying to coordinate a single close with all investors simultaneously.
- SAFE fundraising may be much easier now that both founders and investors have more certainty and transparency into what each side is giving and receiving.
ARE SAFEs DEBT OR EQUITY INSTRUMENTS?
- SAFEs are neither debt nor equity. Instead, SAFEs are contractual rights to future equity. These rights are in exchange for early capital contributions invested into the company.
- SAFEs allow investors to convert investments into equity during a priced round at some future point.
- SAFEs are advanced, high-risk instruments that may never turn into equity.
- SAFEs don’t accrue interest, nor are issuers required to repay investors if they fail.
- However, when a SAFE goes smoothly, investors’ rights are generally greater than those rights of common stock shareholders. As such, SAFEs offer preferential rights, which are extremely attractive to experienced investors.