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Simple Agreement for Future Equity (SAFE)
Practical Law Glossary Item w-001-0673 (Approx. 3 pages)
Glossary
Simple Agreement for Future Equity (SAFE)
A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.
A SAFE is an investment contract between a startup and an investor that gives the investor the right to receive equity of the company on certain triggering events, such as a:
- Future equity financing (known as a Next Equity Financing or Qualified Financing), usually led by an institutional venture capital (VC) fund.
- Sale of the company.
The price of the equity that the SAFE holders receive on conversion is lower than the price of the securities issued to VC investors in connection with a Next Equity Financing, based on both or either:
- Discount rate.
SAFEs may have similar conversion features but lack the debt hallmarks of convertible notes. In particular, a SAFE has no:
- Maturity date. Until a conversion event occurs, SAFEs remain outstanding indefinitely.
- Accruing interest. Investors receive only a right to convert their SAFEs into equity at a lower price than the investors in the subsequent financing (based either on the discount or valuation cap in their SAFEs).
The startup accelerator Y Combinator introduced the SAFE in late 2013, and since then, it has been used by many startups as the main instrument for early-stage fundraising. The original SAFE was based on a pre-money valuation. In 2018, Y Combinator amended its form SAFE agreement to be based on a post-money valuation. Others in the startup finance ecosystem have also created form documents very similar to the SAFE, sometimes different names.
For more information on SAFEs, see Practice Note, Startup Seed Financings: Overview.