A Simple Agreement for Future Equity (SAFE) is a widely used investment instrument designed to help startups raise capital without immediately determining a valuation. Originally introduced by Y Combinator (American Technology Start-up & Venture Capital Firm) in 2013, SAFEs provide investors with the right to receive equity in the company at a future date, typically when a subsequent funding round occurs.
Unlike traditional equity investments or convertible notes, a SAFE is not a loan, does not accrue interest, and has no maturity date. This makes it a founder-friendly and flexible funding mechanism that streamlines early-stage fundraising.
When an investor enters into a SAFE agreement with a startup, they provide capital in exchange for a future equity stake. The actual number of shares the investor receives is determined when the startup raises a priced round (i.e., an investment round that establishes the company’s valuation). The SAFE typically includes provisions that define how the equity conversion will occur:
For Startups:
For Investors:
While SAFEs are advantageous, they also come with risks:
SAFEs and convertible notes serve similar purposes but have key differences:
SAFEs have become a popular financing tool for startups due to their simplicity and flexibility. While they benefit both founders and investors, it’s crucial to understand the risks and terms before agreeing. Startups should assess their funding needs and long-term equity strategy, while investors should evaluate the potential risks and rewards of SAFEs compared to other investment options.
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