What is a SAFE? 5 Things to Know

By Drew Stevens - August 3, 2018 - Startups + VC

Raising money for your company? A Simple Agreement for Future Equity (“SAFE”) can be a great alternative to the more traditional convertible notes, in certain cases.

A SAFE is exactly what it sounds like. An investor gives money to your company. In exchange for funding, the investor has the right to obtain stock in your company, pursuant to the terms of the SAFE.

Considering using a SAFE? Here are a few points to keep in mind:

1. SAFEs can be much easier to work with.

Generally, a SAFE can be a much shorter and simpler-to-digest document compared to a convertible note. SAFEs can be around five pages and remove some of the more time-consuming aspects of a convertible note. Practically, this can mean reduced time in negotiating terms and decreased legal fees.

2. Don’t skip the term sheet step.

Given that SAFEs can be more straight-forward than convertible notes, you may be tempted to try and save your company some time and money in foregoing the term sheet. Don’t.

A good term sheet can often facilitate a quicker transaction, reduce time and costs in negotiating a SAFE, and ensure that all parties fully understand the key terms of the deal.

3. SAFEs are not debt instruments, and there are no maturity dates.

Unlike convertible notes, SAFEs aren’t debt. The clock isn’t ticking as there are no maturity dates, nor will you burn time negotiating an interest rate.

4. Core issues to focus on.

In contemplating the terms of your SAFE, focus on conversion events and conversion prices and discounts. Typical conversation events include the next round of equity financing, a change of control in the company, an initial public offering, termination of operations, or dissolution of the company.

5. Be aware of whether your investors quality as accredited or non-accredited investors.

Even though SAFEs are simpler, your company should still be aware of securities laws and the status of your potential investors. If you are dealing with accredited investors, a good SAFE will have a provision that acknowledges the investor is accredited under Rule 501 of Regulation D of the Securities Act of 1933.

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