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Simple Agreements for Future Equity (SAFEs) are one of the simplest and most common forms of fundraising employed by early-stage founders. SAFEs were pioneered by renowned accelerator Y Combinator in 2013 to provide a standardizedway for early-stage startups to raise capital cheaply and efficiently (see the SAFE templates from Y Combinator www.ycombinator.com/documents/). Aptly named, a SAFE is an agreement between founders and investors to provide capital now in exchange for ownership of the company at a later date. The catch is that both the amount of ownership and the date at which the investor receives it are unknown (and not guaranteed). SAFEs share many of the same characteristics as their big brother, the convertible note, but without some of the bells and whistles like interest and maturity dates that provide additional upside and protections to the investor.
SAFEs are primarily used by less sophisticated private investors and their early-stage company counterparts for pre-revenue or early-revenue businesses. The standardized terms, low legal costs, and lack of need for complicated diligence and valuation techniques make them ideal for quick and easy capital infusions to flesh out an initial business model. Additionally, the lack of interest accumulation and maturity thresholds provide more flexibility for founders trying to avoid cash crunches or premature dilution.
While SAFEs are relatively standardized documents, the key terms that need to be agreed upon by founders and investors are as follows:
Caroline invests in GreenStuff, LLC, an early-stage venture founded by Elizabeth that is attempting to turn its nascent battery technology into a successful enterprise. After some quick negotiation, they agree on a SAFE with the following terms:
After six months, GreenStuff issues an additional SAFE with identical terms except for a 20% discount rate. Caroline writes Elizabeth to exercise her MFN clause to receive the 20% discount rate as well. Six months later, GreenStuff has begun to experience significant traction and raises a priced preferred equity round from a venture capital fund at a post-money valuation of $5MM, which results in 1MM shares outstanding at a PPS of $5.00. Because the post-money valuation is less thanthe valuation cap, the discount rate (rather than the valuation cap) will apply to the preferred equity exchange of the SAFE. A 20% discount to the PPS of $5.00 results in a PPS of $4.00. Caroline exchanges her $50k SAFE for 12,500 shares of preferred equity.
Simple Agreements for Future Equity (SAFEs) are one of the simplest and most common forms of fundraising employed by early-stage founders. SAFEs were pioneered by renowned accelerator Y Combinator in 2013 to provide a standardizedway for early-stage startups to raise capital cheaply and efficiently (see the SAFE templates from Y Combinator www.ycombinator.com/documents/). Aptly named, a SAFE is an agreement between founders and investors to provide capital now in exchange for ownership of the company at a later date. The catch is that both the amount of ownership and the date at which the investor receives it are unknown (and not guaranteed). SAFEs share many of the same characteristics as their big brother, the convertible note, but without some of the bells and whistles like interest and maturity dates that provide additional upside and protections to the investor.
SAFEs are primarily used by less sophisticated private investors and their early-stage company counterparts for pre-revenue or early-revenue businesses. The standardized terms, low legal costs, and lack of need for complicated diligence and valuation techniques make them ideal for quick and easy capital infusions to flesh out an initial business model. Additionally, the lack of interest accumulation and maturity thresholds provide more flexibility for founders trying to avoid cash crunches or premature dilution.
While SAFEs are relatively standardized documents, the key terms that need to be agreed upon by founders and investors are as follows:
Caroline invests in GreenStuff, LLC, an early-stage venture founded by Elizabeth that is attempting to turn its nascent battery technology into a successful enterprise. After some quick negotiation, they agree on a SAFE with the following terms:
After six months, GreenStuff issues an additional SAFE with identical terms except for a 20% discount rate. Caroline writes Elizabeth to exercise her MFN clause to receive the 20% discount rate as well. Six months later, GreenStuff has begun to experience significant traction and raises a priced preferred equity round from a venture capital fund at a post-money valuation of $5MM, which results in 1MM shares outstanding at a PPS of $5.00. Because the post-money valuation is less thanthe valuation cap, the discount rate (rather than the valuation cap) will apply to the preferred equity exchange of the SAFE. A 20% discount to the PPS of $5.00 results in a PPS of $4.00. Caroline exchanges her $50k SAFE for 12,500 shares of preferred equity.
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