Simple agreements for future equity (SAFEs) are a great
alternative to the convertible note. Instead of spending hours
negotiating interest rates, maturity dates and security interests,
SAFEs offer a quick, easy alternative. But as we know, it is always
better to be safe than sorry - so here are our hot tips.M
What's in the SAFE?
As the name suggests, SAFEs are simple. Investors fund a
company, and in return they are given shares at a later date.
Unlike its older sister, the
convertible note, a SAFE is not considered debt finance. This
means investors can't register a security interest and instead
hold a contractual right to shares in the future. Typically, equity
converts based on a predetermined valuation cap or discount once a
liquidity event occurs based on the amount of money that has been
Spend time thinking of the right valuation cap. If you're
the investor, make sure the cap is limited to the proportion that
you are willing to take for your investment. If you're the
company, make sure the valuation cap isn't so low that you end
up giving away too much of your company once it hits it big.
The events that will trigger the shares being issued might
a future round of capital raising;
a trade sale;
or consider even a capped date or term (while perhaps not so
common in a SAFE, we suggest an investor think about whether they
want to include one so the investor doesn't end up in
no-man's land if a liquidity event never happens).
Make sure you get the timing right depending on the different
trigger events. For example, an investor should get their shares
before a sale event or IPO but in the case of a future capital
raise the investor should get their shares at the same time as the
We think it's safe to say that the SAFE is a great
alternative to debt financing. Unlike banks or loan providers most
angels and venture capitalists are in the business of investing and
not lending. It is for this reason that investors find that SAFEs
have a greater psychological appeal in comparison to convertible
Questions? Need help unlocking your SAFE? Give us a call.
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quite proud of it really.
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