What is a SAFE startup?

A SAFE is an investment contract between a startup and an investor that gives the investor the right to receive equity of the company on certain triggering events, such as a: Future equity financing (known as a Next Equity Financing or Qualified Financing), usually led by an institutional venture capital (VC) fund.

How does a SAFE work startups?

A SAFE is an investment contract between investors and companies looking to raise capital. Individuals make investments in exchange for the chance to earn a return—in the form of equity in the company—if the company experiences another round of financing, conducts a token-generation event*, is acquired or has an IPO.

What is a SAFE startup funding?

SAFEs are a form of financing that allow investors to convert their investment into equity at a future priced funding round or liquidation event. Many early-stage deals utilize SAFEs to simplify and streamline the financing process. SAFEs are the most popular investment instrument on AngelList.

What does investing in a SAFE mean?

A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.

What is the difference between a convertible note and a SAFE?

A convertible note is debt, while a SAFE is a convertible security that is not debt. As a result, a convertible note includes an interest rate and maturity rate, while a SAFE does not. A SAFE is simpler and shorter than most convertible notes.

Startup Financing 101: How SAFEs and Convertible Notes Work | Equity funding explained

Do investors prefer convertible notes or SAFEs?

A well-known Silicon Valley tech accelerator created SAFE notes, so Silicon Valley investors are likely to be more comfortable with them. Investors also like convertible notes because they are more restrictive for founders, have maturity dates that require renegotiation to extend, and tie up collateral and assets.

Are SAFE notes legally binding?

Essentially, a SAFE note acts as a legally binding promise to allow an investor to purchase a specified number of shares for an agreed-upon price at some point in the future.

Are SAFEs good for founders?

SAFEs are attractive to founders, especially at the pre-revenue stage, for two reasons: They're very simple. The founders don't have to hire a lawyer to draft the agreement (although I wouldn't discourage them from getting good legal advice).

Is a SAFE a priced round?

SAFEs convert into stock in a future priced round. They're considered a type of warrant—not a debt—meaning they give investors certain equity rights.

Are SAFEs good for investors?

A SAFE note provides an influx of capital without the restrictions of covenants, promises of repayment or initial control or dilution issues of a direct equity issuance. Clarity on equity conversion: One of the most valuable benefits is clarity of how much equity is being issued.

How are SAFEs taxed?

Depending on the terms of the SAFE and the facts and circumstances relevant to its issuance, a SAFE should be treated as either equity or a variable prepaid forward contract from a U.S. federal income tax perspective.

Can you do a SAFE agreement as an LLC?

SAFEs are for Corporations.

If your business is already organized as a limited liability corporation or LLC then you may not be eligible to offer SAFEs because LLCs have “membership interests” as opposed to “shares.” Check your state's laws or contact us to see if it's possible for your entity to issue a SAFE.

What is the safest investment with highest return?

9 Safe Investments With the Highest Returns

• Certificates of Deposit.
• Money Market Accounts.
• Treasury Bonds.
• Treasury Inflation-Protected Securities.
• Municipal Bonds.
• Corporate Bonds.
• S&P 500 Index Fund/ETF.
• Dividend Stocks.

How does a SAFE work for investors?

A SAFE is an agreement to provide you a future equity stake based on the amount you invested if—and only if—a triggering event occurs, such as an additional round of financing or the sale of the company.

Is SAFE a liability or equity?

The SEC does not state anywhere in the article that a SAFE is a liability or equity, but is quick to note that SAFEs are not traditional equity.

Are SAFEs debt or equity?

SAFE agreements are neither debt nor equity. Instead, they're the contractual rights to future equity. These rights are in exchange for early capital contributions invested into the startup. SAFE agreements allow investors to convert investments into equity during a priced round at some future point.

Do SAFEs convert pre money or post-money?

Because a SAFE involves converting money into equity at a later date, SAFEs are often referred to as convertible securities. Under most SAFEs, the investor receives the shares in the next priced round of financing (usually a Series Seed or Series A round).

Can a SAFE note be repaid?

Risks to investors: SAFE notes are not an official debt instrument. This means there is a chance they will never convert to equity and that repayment is not required.

Do SAFEs have interest rates?

SAFEs are not a debt instrument. Instead, they are defined as a warrant. That means they do not carry an interest rate.

Why do founders like SAFEs?

SAFEs are now largely “Post-Money” meaning the founders know exactly how much dilution they are getting because they know the capped valuation of the company inclusive of the “value” of the money being put into the company. The simple formula is: Pre-money valuation + Money raised = Post-money valuation.

What happens to SAFE note if startup fails?

When a startup fails, the company typically has run out of money. The owner of a convertible note may get nothing, or at best may only receive pennies on the dollar. You also may be able to write off your loss. There are a number of factors that go into determining what happens with a convertible note.

What is a kiss note?

A KISS agreement (which is a Keep It Simple Security), is a simplified investment structure that is similar to a convertible note, which gets capital into your company much faster than more conventional methods.

How do SAFE investors get paid back?

If the company has a change of control or an IPO before the SAFE has converted, the investor will receive, at their option, a cash payment for their purchase amount or the equivalent in common stock of the company.

How do you explain a SAFE note?

A SAFE note is a form of convertible security. In other words, it's something paid for now that turns into something different later. In the context of SAFE notes, that something now is an agreement between a company and investor, and that something later is equity.

Can a SAFE convert to common stock?

The investor can choose to have the safe purchase amount returned, or convert the safe into shares of common stock and receive the cash consideration with the other common stockholders.