SAFE Agreement
A SAFE is the classic fundraising instrument for early-stage companies. Whether you are a corporation or an LLC, a SAFE is often used when the company valuation is too debatable to nail down a stock (or membership interest) price AND when founders want to keep the costs of a capital raise as low as possible.
Unlike a convertible note, a SAFE does not bear interest, come due at a maturity date, nor does it sit on the balance sheet as debt.
You can download the SAFE Agreement for free by visiting Y Combinator. However, if you want someone to walk you through the process, fill out the form here and we'll get you started. Note that we help you finalize your SAFE for a fixed fee, but if you want us to manage the raise we charge hourly.
FAQ'S ON SAFE AGREEMENTS:
What is a SAFE Agreement and why is it beneficial for startups?
A SAFE (Simple Agreement for Future Equity) is now a very common investment agreement used by startups to raise capital through "future equity" that is promised to be provided at a later date, typically after a priced round of financing, like a Series A. It's beneficial because it allows startups to secure funding without setting a valuation immediately, reducing complexity and negotiation time with investors. A convertible note also allows for an investment without setting a valuation, and often this is a good fit for more sophisticated investors and start-ups, but a SAFE is often seen as beneficial because it is a form agreement that needs no tailoring and very little negotiation. (More on the differences between a SAFE and a convertible note below.) As such, a SAFE is often a common choice for a very early fundraising round where a company and investors want to save time and money to keep the investment simple.
What are the key differences between a SAFE and a Convertible Note?
The primary difference between a SAFE and a Convertible Note is that SAFEs do not accrue interest and do not have a maturity date, whereas convertible notes typically have both. This makes SAFEs simpler and potentially less costly in the long run as they convert into equity under specific conditions set by future pricing rounds. However, for the same reason, Convertible Notes are often a better choice for investors because they provide a definite time horizon for the investment and they compensate the investor with interest. Another key difference from the company perspective is that Convertible Notes are carried on the balance sheet as debt, where a SAFE is considered equity. This can make a difference in companies who are positioning themselves for financing.
How does a SAFE Agreement protect investors?
A SAFE Agreement protects investors by giving them the right to future equity in the company, usually under favorable terms compared to later investors. This agreement stipulates conversion triggers, usually tied to valuation events like subsequent funding rounds or a sale of the company, ensuring investors that their contributions are recognized in equity allocations. On the other hand, because of the indefinite time horizon of a SAFE, it is a more risky investment than a Convertible Note or a priced equity investment.
Is a SAFE Agreement suitable for all types of investors?
SAFE Agreements are typically suitable for early-stage investors who are willing to take on higher risk for potentially higher rewards. They are not traditional debt instruments and do not provide immediate returns or interest payments, which may not be suitable for all investor types, especially those looking for regular income streams or less risk. While a SAFE is often the cheapest and easiest way to raise funds, a round of Convertible Notes can also be very streamlined and may offer a more favorable and attractive investment.