Securities and security exemptions
How the SAFE works
What is the SAFE?
A Simple Agreement for Future Equity
A SAFE is an investment agreement 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 an equity financing or liquidity event (e.g., another round of financing, conducts a token-generation event*, is acquired or has an IPO).
The SAFE was originally created by Y Combinator and can be customized infinitesimally. Generally, SAFEs are widely used by angels and VCs investing in startups.
* Recently, companies in the blockchain space have started using SAFEs - or SAFTs (Simple Agreement for Future Tokens) - as a way to sell future tokens. You should read these SAFTs specifically for the terms and conditions associated with conversion and the risks associated with holding shares on a blockchain.
How does it work?
Investors using the SAFE get a financial stake in the company, but are not immediately holders of stock. Investments are converted to equity if certain “trigger events” occur, such as the company’s future financing, acquisition, IPO or another event pre-determined by the SAFE.
Risk note: trigger events are not guaranteed. Investors should see them only as possibilities.
How much can I earn?
Your return depends on your investment amount, the company’s valuation (how much the company is worth if and when the trigger event happens), and the specific terms of the SAFE.
Risk note: If there is never an exit valuation you may never get a return on your investment.
Terms of the SAFE
Each company can customize its SAFE, including or excluding certain provisions. Most include a valuation cap and a discount, others simply specify the price at which shares can be acquired in the future. If the SAFE includes both a valuation cap and a discount, the provision more favorable to the investor applies if there is ever a trigger event.
The below are examples of terms found in a SAFE, you may see all or some of them.
Valuation cap
The valuation cap specifies the maximum valuation at which the investment converts into equity shares or cash. This means that investors, when a trigger event occurs, receive equity shares or cash at the valuation cap price—even if the valuation of the First Equity Financing is higher. Ultimately, a valuation cap protects an investor’s upside by specifying the highest valuation the SAFE will convert. The lower the conversion valuation, the more equity an investors may receive. Conversely, the higher the subsequent valuation, the lower the number of shares, or equity, you will receive.
Discount
A discount is a pre-set reduction in the price that an investor pays at a later financing round for equity. The purpose of a discount is to provide early-stage investors with additional (or alternative) upside beyond the valuation cap.
Price per share
The price per share denotes the cost per share at the time the investment converts into equity shares or cash. This means that investors, when a trigger event occurs, receive equity shares or cash as if they had purchased shares at the time of the SAFE purchase at the specified price.
FAQ
When can I expect a return?
Investors can earn a return if a trigger event occurs at a certain price threshold. Although trigger events sometimes happen earlier, many don’t occur for 4-6 years after the initial investment, and some take even longer.
Risk note: Startup investing is risky, so there’s no guarantee of a return on this kind of investment.
Can I sell my SAFE?
In general, you can only sell a SAFE after one year from purchase date and only if you find a buyer, which might not be easy to do. Some SAFEs restrict liquidity further, check the terms and conditions.
Will my SAFE get converted in the startup’s next round?
In the event of a subsequent equity financing round, the company will generally convert the SAFE. Please consult the SAFE for further details.