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:
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:
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.