SAFE is a financing contract that a startup might use for raising capital during the first rounds for seed funding.
SAFE, also known as the Simple Agreement for Future Equity, is a financing contract that a startup might use for raising capital during the first rounds for seed funding.
This financial instrument is often taken as a more founder-friendly alternative, compared to convertible notes. In short, a SAFE is a contract that is made between an investor and a company. As per the SAFE, the investor obtains the rights to get the company’s equity based on specific triggering events like:
- Sale of the company.
- Any equity financing that takes place in the future (known as Qualified Financing or Next Equity Financing), which is normally lead by VCs.
The SAFE holders receive a conversion to shares at a much lower price compared to the actual price of the securities. This conversion is based on either the discount rate or valuation cap. On the other hand, VCs investing in the company in the next equity financing round get the equity at the FMV of the shares at that time.
How is this different from a convertible note?
While SAFEs do have all the same features as the conversion notes, it does not have the debt hallmark that convertible notes have. In short, SAFEs do not have a:
- Maturity date – This means that until the conversion event occurs, the SAFEs would remain outstanding indefinitely.
- Accruing interest – The investors can only convert the SAFEs at a lower price compared to investors of the next financing round. The conversion would be based on the valuation cap or discount of the SAFEs.
As a matter of fact, SAFEs are relatively a recently added financing tool in the business world. If you want to understand more about this, Eqvista can help you to get a better idea. And if you are looking for a useful cap table application for your company, then you should try out our software at Eqvista. Check it out here!