What's a Simple Agreement for Future Equity (“SAFE”)?

For starters, it is a simplified way to invest in a company but the mechanism of doing so is not so straightforward… Let's begin.

As opposed to a traditional equity investment where the investor purchases shares of stock, or a traditional debt investment where the investor loans funds to the company, a SAFE is something distinct.

A SAFE provides the investor the right to receive ownership of the company (e.g., shares of preferred stock) at a later, pre-defined date. That date is usually the company’s next equity financing. Meaning the investor will give the company a principal amount of money for the right to receive shares when the company ultimately completes their next equity financing (e.g., Series Seed, Series A, etc.).

The amount of shares the investor will ultimately receive is dependent on the terms of the SAFE. SAFEs can be issued with or without a Valuation Cap or Discount. The Valuation Cap and/or Discount (or lack thereof) impacts the conversion calculation that determines the ultimate number of shares received in the future financing.

For example, with a Valuation Cap SAFE, when the SAFE ultimately converts into shares at the next equity financing, the number of shares received by the investor will be dependent on the SAFEs Valuation Cap and the investor’s investment. At the time of the next equity financing, to determine the price per share, the Valuation Cap will be divided by the company’s capitalization (i.e. shares outstanding). The number of shares the investor receives is then determined by dividing their initial investment by the price per share.

Alternatively, if the SAFE has a discount, the price per share will be calculated by applying the discount to the lowest price per share paid by cash investors in the next equity financing. So if the Series Seed price per share is $1 and the investor’s SAFE had a 20% discount, the price per share for the SAFE investor would be $0.80.

Please note, SAFEs can incorporate either/both/neither a Valuation Cap and Discount. If both are included, the investor’s SAFE will convert at the price that results in the investor receiving more shares. If neither, the investor will have a price per share identical to the cash investors in the future financing.

General warning, the market standard SAFEs were created by Y Combinator and can be accessed on their website. Always check a SAFE against the baseline form document as it is not uncommon for edits to be made to the documents that can dramatically change their function.