SAFE (Simple Agreement for Future Equity)

Defintion:

Simple Agreements for Future Equity (SAFEs) are a flexible and straightforward fundraising tool. In the traditional fundraising process, investors hand over money in exchange for equity in your company based on a negotiated valuation of the business. With a SAFE, you promise investors future shares of stock for their investment today.

How much can you raise on a SAFE note?

There is no limit to how much money a startup can raise through SAFEs. However, it takes two to tango, and how much funding investors will want to put towards SAFEs will largely depend on your company’s valuation cap and how much they believe their stake will diminish as your company continues to grow.

Do investors prefer convertible notes or SAFEs?

Conversion notes are a lot like SAFEs in that they are both securities that get activities at later dates. However, convertible notes can provide more value to investors in some circumstances. These are just a few of their advantages for investors:

• Convertible notes have a maturity date, interest rate, and can be used by a C-corp, meaning that investors can accrue revenue through interest payments over time.
• Convertible notes allow companies to receive capital without a complicated equity round.
• Convertible notes allow investors to change the note into equity if the startup is acquired.

Are SAFEs good for startups?

Every SAFE opportunity should be assessed on a case-by-case basis. However, SAFEs provide a path for startup founders to acquire venture capital immediately while delaying the paperwork, cost, and time required to conduct a traditional equity round, which can be advantageous.

What is a SAFE note example?

Your company recieves a $500,000 investment through a SAFE note.
You negotiate a 20% discount rate and decide on a $2 million valuation cap.
A few years later you hold an fundraising round and your lead investor sets a new valuation of $4 million.
Because of your SAFE investor’s discount, they’ll get shares at $0.80 a share, resulting in 625,000 shares to match their initial $500,000 investment.