A simple Agreement for Future Equity (SAFE) is an investment vehicle which is commonly used by early-stage startups. The investor will invest funds to the corporation which are initially treated as a loan, but the funds are later converted into shares, generally when there is a more significant investment in the corporation. At the time of the conversion, the purchase price for the more significant investment is used, but the parties may negotiate a discount and/or cap.
These are the main considerations for a SAFE:
- the investment amount
- when the SAFE will convert - often this will be at the time of a future investment which is at a valuation which is greater than a certain amount or which generates investment proceeds in excess of a certain amount
- whether to include a valuation cap, which is the maximum valuation at which the shares will convert (for example, if the price per share of the valuation cap is less than the price that the SAFE would otherwise convert into shares, the SAFE will convert at the price per share determined using the valuation cap)
- whether to include a discount rate, which is the discount this investor will receive at the time the SAFE converts (for example, if the more significant investment is made at $1.00 per share, and the discount rate is 80%, the SAFE investor will pay $0.80 per share.
- when the SAFE terminates, which is generally after the loan has been converted or when the loan has been repaid (because certain events have occurred, such as the dissolution of the corporation or voluntary termination of its operations).