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Simple Agreement for Future Equity

An investor and a corporation can enter into a simple agreement for future equity (SAFE), which is similar to a warrant in that it gives the investor rights for future equity in the company without specifying a share price at the time of the original investment. When a liquidity event or priced round of investment takes place, the SAFE investor receives the future shares. SAFEs are designed to offer entrepreneurs an easier method of obtaining seed money besides convertible notes.

Types of Simple agreement for future equity (SAFE) Instruments

There are numerous varieties of SAFE instruments. The distinction between the various sorts of instruments comes from how they are turned into equity. Following is a list of some typical variations:

  • Discount SAFE: Discount SAFEs are financial products with a similar structure to convertible notes. This indicates that there is a discount factor for certain SAFEs. The SAFE holder will be permitted to convert to equity at a 20% discount in comparison to other shareholders if the discount factor is 20%.
  • No-Cap SAFE: Investors may choose not to use the SAFE's discount feature in particular circumstances. They frequently exchange the discount function for a feature with no valuation cap. There are no valuation caps on this kind of SAFE. So, by choosing the No-Cap SAFE option, an investor can acquire a substantial equity position in the underlying company.
  • MFN SAFE: There are more SAFE instrument types in which the SAFE's terms and conditions are not predetermined. Nonetheless, the startup's owners guarantee that SAFE investors will receive "most favored nation" treatment. This indicates that they guarantee the greatest offer possible for SAFE investors in comparison to other investors. So, compared to other investors, the startup owners must offer these investors better discount terms and no cap terms.

Pre Money Vs Post Money SAFE

The Straightforward Agreement for Future Equity (SAFE) type that is offered on the market comes in another variation. Pre-money SAFE and post-money SAFE instruments are additional categories for SAFE instruments. The key distinction between the two is that with pre-money SAFE, investors are unsure of what portion of the business they will own after the SAFE is converted to equity. This percentage depends on how much money is invested in each round. As opposed to pre-money SAFE, investors in post-money SAFE are certain of the amount of equity they will own in a company once the SAFE is converted into equity shares.

Events Governing the SAFE

Although a simple agreement for future equity (SAFE) is regarded as a fairly "simple" financial instrument, investors and founders would benefit from knowing exactly what to anticipate in the event that the following circumstances arise.

  • Equity financing: The majority of SAFE instrument contracts make it quite explicit what will happen if an equity financing round is conducted. Hence, in this instance, there is little need for clarification. Investors must make it clear whether they will receive company shares or the cash equivalent of business shares following an equity transaction, nevertheless.
  • Liquidity event: Before the conversion of SAFE to equity shares, a corporation might be sold to another business. What will happen to the SAFE instruments in this situation needs to be made clear by investors and founders.
  • Dissolution: A business could also declare bankruptcy before the conversion of SAFE to equity shares. If this situation arises, it would be in the best interests of all parties to be aware of their rights and responsibilities.

Conclusion

The fact is that SAFE differs from convertible notes as a sort of financial instrument. As SAFE does not instantly saddle founders with debt, it is regarded as being more kind. For precisely the same reason, though, few investors actually employ it.

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