Down n’ Dirty: The SAFE (really, just a better convertible note)
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For the last few years, Silicon Valley’s standard funding instrument for seed-stage startups was the convertible note. Today, the standard instrument is still the convertible note. However, as is always the case with Silicon Valley, it iterates. Enter stage right: the simple agreement for future equity (SAFE for short), which was designed by Y Combinator’s Legal Dream Team.
The SAFE is an incredibly simple form of financing. In the same vain as a convertible note, a SAFE allows an investor to invest in an early-stage company immediately in exchange for equity at a future time, usually with that time being an equity financing or acquisition. The SAFE’s conversion to equity terms are highly flexible, they can include a discount, valuation cap, “most favored nations” clause, or any other number of terms.
Here are some of the basic facets of a SAFE financing:
Benefits of SAFE:
1. It’s not debt (or at least it's not intended to be) because it has no due date, but investors only have a right to call repayment of the note if the company goes through a dissolution event; i.e., shutdown.
2. There is no interest on the investment.
3. It’s faster than almost any other financing type.
4. They are cheap to close!
Features of SAFE:
1. Valuation Caps
2. Discounts
3. Most-Favored Nations
4. Rolling Close
Be Careful:
1. A SAFE may raise concerns with some investors who are unfamiliar with Silicon Valley.
2. SAFE’s are still securities and must comply with securities regulation.
Conversion Events:
1. Auto-convert at equity sale, no amount threshold
a. If Pre-money > Safe valuation cap, conversion occurs at value cap
b. If Pre-money < Safe valuation cap, conversion occurs at pre-money
2. At liquidation, conversion is at the valuation cap, the fair market value of common stock at liquidation, or the money invested is returned.
Where you can find more on the SAFE: https://www.ycombinator.com/documents/#safe
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