As businesses look for innovative ways to secure funding, the concept of “safe simple agreement for future equity” (SAFE) has gained popularity in recent years. It`s a new type of investment document designed to reduce the complexity associated with traditional equity rounds and provide a simpler way for startup companies to raise funds.
So, what is a SAFE?
A SAFE is an agreement between a startup company and an investor that provides the investor with the right to receive future equity in the company if certain trigger events occur. These events can include an equity financing round, an acquisition, or an initial public offering (IPO). In essence, a SAFE is a type of convertible security that can convert into equity at a future date.
SAFEs were first introduced by Y Combinator, a startup accelerator, in 2013. They are designed to be a simpler and faster alternative to traditional equity financing rounds, which can be time-consuming and expensive for startups. A SAFE allows a startup to raise funds quickly and without the need for a valuation.
How does it work?
A SAFE includes a valuation cap and a discount rate. The valuation cap sets the maximum valuation at which the investor can convert their investment into equity. The discount rate provides the investor with a discount on the price per share in an equity financing round.
For example, if a startup raises a seed round at a $5 million valuation cap with a 20% discount rate, and the next funding round is at an $8 million valuation, the SAFE investor would convert their investment at a $5 million valuation, with a 20% discount. This means that the SAFE investor would receive equity at a $4 million valuation.
Is it safe for investors?
As the name suggests, a SAFE is designed to be a safe investment for investors. However, it`s important to note that a SAFE doesn`t provide the same level of protection as traditional equity investments. SAFE investors don`t receive voting rights or dividends, and they are not protected in the event of a bankruptcy or liquidation event.
However, SAFE investors do have a chance to participate in the upside of the company if it reaches certain trigger events. They also have the right to receive their investment back if the company doesn`t raise an equity financing round or reach any other trigger event within a certain time frame.
In conclusion, a SAFE is a new type of investment document designed to provide a simpler and faster way for startups to raise funds. It`s a safe investment option for investors, but it doesn`t offer the same level of protection as traditional equity investments. As with any investment, it`s important for investors to do their due diligence and understand the risks involved.