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A Simple Agreement for Future Equity (SAFE) is an investment structure, formalized through a financing contract, that allows early-stage startups to invest in themselves by raising capital through a process called seed financing rounds.
It provides investors the right to purchase a specified number of shares in the future from a company, at an agreed-upon price. This price is usually at the same valuation as other investors participating in the SAFE.
The term of the agreement is usually set at no more than seven years and generally includes a 1x return on investment if investors follow through with their commitment to becoming shareholders of record after a three-year holding period.
A SAFE is most commonly offered as part of a convertible note, or SAFE note — a short-term bank loan with an attached conversion option. This type of agreement is commonly referred to as an equity agreement and are formalized through an equity purchase agreement, or contract, that can include an equity commitment letter as well as an investor rights agreement.
Equity agreements protect both parties in a deal of this nature. SAFEs can be used by companies seeking growth capital from angel investors or venture capitalists as part of seed financing rounds.
Here is an article explaining more about a simple agreement for future equity.
The key terms of a SAFE include the investment amount, the valuation cap, and the conversion discount.
The investment amount is the amount of money that the investor is investing in the company. Investors are attracted to companies with revenue and growth potential. If you can show investors that you have proof that customers are willing to pay for your product, they will feel more confident investing in you.
Demonstrate traction through metrics like daily active users, monthly recurring revenue (MRR), or sales pipeline. The investment amount is the total amount a startup receives from investors at one time. This figure often has multiple components such as:
The valuation cap is the maximum value of the company that the investor is entitled to purchase shares. This could be a lower value than the pre-money valuation of the company. The valuation cap may be set by either party; however, it is often set by investors to protect themselves from overvaluation.
The conversion discount is the percentage discount that the investor receives on the shares that they purchase. For example, if an investor purchases 100,000 shares at $1.00 per share and their investment has a 5% conversion discount, then they’d receive 95,000 of those shares at $0.95 per share. In this case, they would own 95,000 shares and still have 5,000 left to convert.
Here is an article about what startups should know about a SAFE agreement.
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The most common type of SAFE is the valuation cap, no discount SAFE. This type of SAFE does not provide the investor with a discount on the shares that they purchase.
Another type of SAFE is the valuation cap, with discount SAFE. This type of SAFE provides the investor with a discount on the shares that they purchase. The discount is usually between 10% and 20%.
The third type of SAFE is the no valuation cap, with discount SAFE. This type of SAFE does not have a valuation cap but does provide the investor with a discount on the shares that they purchase. The discount is usually between 10% and 20%.
The fourth and final type of SAFE is the no valuation cap, no discount SAFE. This type of SAFE does not have a valuation cap and does not provide the investor with a discount on the shares that they purchase.
Here is an article outlining what a SAFE is.
Meet some lawyers on our platformA SAFE is an agreement between an investor and a company that allows the investor to purchase shares in the company at a future date. The agreement is called SAFE because it is a simple agreement that does not have the same terms and conditions as a traditional investment agreement.A SAFE allows a company to raise money from investors without having to go through the traditional equity financing process. This can be a helpful tool for companies that are not ready to go through the equity financing process or for companies that want to raise money quickly.
Here is an article outlining five key things you should know about a SAFE agreement.
SAFEs are structured with a company's equity as the underlying asset. This means that SAFEs are considered to be equity instruments rather than debt instruments. This is because the equity agreement does not require the company to pay back the investment, with interest, as a debt instrument would.
Here is an article about equity investments vs. convertible debt instruments.
A company will issue a SAFE to an investor in exchange for an agreed-upon price. The SAFE will have a valuation cap and a conversion discount. The valuation cap is the maximum amount of money that the investor can pay for the shares. The conversion discount is the percentage discount that the investor will receive on the shares.The investor will be able to purchase the shares at the valuation cap price at a later date. The shares will convert into equity at a later date, usually when the company raises money through a Series A financing round.
Here is an article outlining key terms and explaining how SAFE agreements work.
One of the main advantages of using a SAFE is that it is a quick and easy way to raise money. SAFEs can be issued in a matter of days, whereas a traditional equity financing round can take weeks or even months to complete.Another advantage of using a SAFE is that it can help a company to avoid some of the costly and time-consuming aspects of the equity financing process, such as hiring a financial advisor or going through a due diligence process.One of the challenges of using a SAFE is that it can be difficult to predict how much money a company will raise. This is because the valuation cap is not set in stone and can change over time.Another challenge of using a SAFE is that it can delay the equity financing process. This is because the investor will not be able to convert the SAFE into equity until a later date, usually when the company raises money through a Series A financing round.
Here is an article outlining the pros and cons of SAFE agreements.
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A corporate and commercial attorney with experience in transactional legal services including corporate and finance transactions, mergers and acquisitions, real estate, commercial contracts, bankruptcy, restructuring, international business transactions and general counsel services. Additional background skills and experience include investment banking, financial analysis, and commercial litigation. Sectors covered include technology, media, franchises, and business services providers, from start-ups to medium and large enterprises.
I am a startup veteran with a demonstrated history of execution with companies from formation through growth stage and acquisition. A collaborative and data-driven manager, I love to build and lead successful teams, and enjoy working full-stack across all aspects of the business.
As a licensed AL lawyer with over 7 years of experience in the legal field, I have spent more than 15 years working in the business and finance sector. I am deeply passionate about immigration, contracts, & my expertise spans a wide range of projects. From handling ICOs & IPOs to navigating VCs, SaaS, OnlyFans, Wholesaler & Manufacturing Agreements, Prenups, Movie Finance, M & As, Visas, Green Cards and more. I have a comprehensive understanding of various contractual needs. Whatever your contract requirements may be, feel free to reach out to me—I can craft or work on any contract with precision and expertise.
My name is Ryenne Shaw and I help business owners build businesses that operate as assets instead of liabilities, increase in value over time and build wealth. My areas of expertise include corporate formation and business structure, contract law, employment/labor law, business risk and compliance and intellectual property. I also serve as outside general counsel to several businesses across various industries nationally. I spent most of my early legal career assisting C.E.O.s, General Counsel, and in-house legal counsel of both large and smaller corporations in minimizing liability, protecting business assets and maximizing profits. While working with many of these entities, I realized that smaller entities are often underserved. I saw that smaller business owners weren’t receiving the same level of legal support larger corporations relied upon to grow and sustain. I knew this was a major contributor to the ceiling that most small businesses hit before they’ve even scratched the surface of their potential. And I knew at that moment that all of this lack of knowledge and support was creating a huge wealth gap. After over ten years of legal experience, I started my law firm to provide the legal support small to mid-sized business owners and entrepreneurs need to grow and protect their brands, businesses, and assets. I have a passion for helping small to mid-sized businesses and startups grow into wealth-building assets by leveraging the same legal strategies large corporations have used for years to create real wealth. I enjoy connecting with my clients, learning about their visions and identifying ways to protect and maximize the reach, value and impact of their businesses. I am a strong legal writer with extensive litigation experience, including both federal and state (and administratively), which brings another element to every contract I prepare and the overall counsel and value I provide. Some of my recent projects include: - Negotiating & Drafting Commercial Lease Agreements - Drafting Trademark Licensing Agreements - Drafting Ambassador and Influencer Agreements - Drafting Collaboration Agreements - Drafting Service Agreements for service-providers, coaches and consultants - Drafting Master Service Agreements and SOWs - Drafting Terms of Service and Privacy Policies - Preparing policies and procedures for businesses in highly regulated industries - Drafting Employee Handbooks, Standard Operations and Procedures (SOPs) manuals, employment agreements - Creating Employer-employee infrastructure to ensure business compliance with employment and labor laws - Drafting Independent Contractor Agreements and Non-Disclosure/Non-Competition/Non-Solicitation Agreements - Conducting Federal Trademark Searches and filing trademark applications - Preparing Trademark Opinion Letters after conducting appropriate legal research - Drafting Letters of Opinion for Small Business Loans - Drafting and Responding to Cease and Desist Letters I service clients throughout the United States across a broad range of industries.
