A simple agreement for future equity (SAFE) is between an investor and a company with regards to future equity. The SAFE investment instrument was released by Y Combinator 2013. It provides rights to the investor for future equity in that company.
This is like a warrant in some aspects. But a fixed price per share is not determined at the time of the initial investment.
The SAFE investor receives the futures shares on the specific occurrences. Hence, this might include a priced round of investment or liquidation event.
How it Works
The precise conditions of a SAFE vary. The investor grants a particular amount of funding to the company at the time of signing. In return, the investor acquires stock in the company at a later date.
It is based on specific, contractually-agreed on liquidity events. The main trigger is ordinarily the sale of chosen shares by the company.
Usually, it is as a part of a future priced fund-raising round. Unlike direct equity investments, shares will not be priced until the SAFE is signed.
Instead, investors and the company negotiate a mechanism. Hence, this mechanism is used to delay current value and sell potential securities. These terms commonly include a valuation cap for the company.
It may or may not include a discount to the share valuation at the moment of the trigger event. This leads to SAFE investor sharing in the upside of the company.
Therefore, this happens between the time of signing of the SAFE (and providing funding) and the trigger event.
The popularity of this investment vehicle has since increased in both the U.S.A and Canada. It is simple and transaction costs are low.
SAFEs intend to provide a simpler mechanism for startups to seek initial funding. Therefore, convertible notes are preferred.
A SAFE is more like a warrant rather than a loan. This is unlike a convertible note. No interest and no date of maturity shall be paid.
Thus SAFEs are not subject to the regulations that debt may be in many jurisdictions. So, this ease is the principal drive for a SAFE. Primarily, they are a less complicated alternative to convertible notes.
Nevertheless, many concerns come up with prevalent use. However, multiple SAFE investment rounds happen before a priced equity round. Consequently, SAFEs might impact entrepreneurs.
Thus, there are potential dangers for non-accredited crowd funding investors. These investors might invest in SAFEs of companies that would never obtain VC financing. Therefore enabling Conversion to equity is tough.