Securities and security exemptions

What is a SAFE?

A SAFE (simple agreement for future equity) is an investment contract used by many early-stage companies to raise capital from investors. SAFEs entitle investors the right to receive equity of the company on certain triggering events (which may or may not occur), such as a future equity financing or the sale of the company. As the name suggests, a SAFE is not immediate equity but rather an agreement that entitles the holder to future equity upon certain trigger events.

Y Combinator introduced the original SAFE in late 2013, a financial instrument widely used by angels & VCs investing in startups. Since then, Republic created a version of the SAFE, the Crowd SAFE, that was an adapted version of the SAFE, designed specifically to work for investment campaigns accepting hundreds or even thousands of investors, and several industry players now use it in various forms.

Republic’s SAFE is similar to Y Combinator’s SAFE in many ways but is distinct in others. To that end, given that these agreements come in several varieties, it’s important to review the specific investment contract (or SAFE) that’s being sold in an offering. 

How does it work?

Investors using the SAFE get a financial stake in the company, but are not immediately holders of equity. Investments are converted to equity if certain “trigger events” occur, such as the company’s acquisition or IPO.

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 exit valuation (how much the company is worth if and when a trigger event happens), and the terms of the SAFE. Investors invest pre-money meaning that their stake is affected by future financing and events.

Risk note: If there is never an exit valuation you may never get a return on your investment.

Terms of the SAFE

Here are the notable characteristics of Republic’s new SAFE.

Pre-Money Valuation Cap

The pre-money valuation cap specifies the maximum valuation at which the investment converts into equity. This means that when a trigger event occurs investors receive equity shares at the valuation cap price—even if the valuation at which the company sells is higher. The higher the company's valuation at the time of sale, the greater the investor’s return.

Discount Rate

If a trigger event occurs, the discount provision gives investors equity shares at a reduced price relative to what others pay at IPO or acquisition. If the SAFE is converted during an equity financing, the discount will allow investors to receive equity at a discounted price compared to what new investors paid.

Trigger Events

1. Equity Financing - The SAFE will convert to equity if there is an equity financing event before the termination of the instrument. The company will issue a number of shares of equity securities to the SAFE holders, based on the purchase amount and the equity financing price.

2. Liquidity Event - If a liquidity event occurs before the termination of the SAFE, the SAFE holders will automatically be entitled to receive a portion of the proceeds.

3. Dissolution Event - If the company closes or dissolves, SAFE holders are entitled to a share of whatever money is left after paying off debts and other obligations. This amount will be based on your initial investment.

Maturity Date

Unlike convertible notes, SAFEs have no maturity date or requirement that the amount invested be returned to the SAFE holders at any point in the future (absent a sale or liquidation of the company). Until a trigger event or conversion event occurs, the SAFE remains outstanding indefinitely.

Interest Rate

Unlike convertible notes, SAFEs do not accrue interest on the principal amount invested.

Nominee and Nominee Designee

Republic introduced the nominee model to ease the burden for both companies and investors. A Nominee is, in essence, an agent that is appointed to act on behalf of all investors and streamline certain processes that are logistically complex and time consuming. These rights include voting and the ability to agree to convert the security into the custodial account on behalf of investors at a predetermined third-party’s instruction. Republic Investment Services LLC, the Nominee, acts at the direction of the Nominee Designee, which is the largest holder of the securities. Learn more about the Nominee here.

Tokenization

Tokenization refers to the digitization of real-world assets where the direct or indirect ownership stake of the asset is represented by a token. Put differently, it is the process of converting rights to an asset into a digital token recorded on a blockchain where a token is a proxy or a means of representing an indirect or direct ownership interest in a particular asset.

The SAFE enables companies to tokenize the SAFE, or subsequent equity issued therefrom, at some point in the future. Republic encourages you to review the offering documents in detail and ask the issuing company any questions regarding tokenization, including, without limitation, what is being tokenized (if anything) and what rights specifically will flow through to the token. 

For example, an issuer may choose to "tokenize" the SAFE itself, which serves as a digital representation of the SAFE; in that case, the security tokens, if issued, embody all rights, preferences, privileges, and restrictions of the SAFE, and no additional rights, preferences, privileges, or restrictions apply to the tokens that do not already apply to the securities.  Alternatively, an issuer may not choose to tokenize the SAFE but instead choose to tokenize the equity securities that the SAFE may convert into at a trigger event.  Furthermore, an issuer may create a token that represents something akin to an "instruction" or "entitlement" related to the SAFE or subsequent security rather than a digital representation of the SAFE or equity interest itself.  

Consequently, it is incumbent upon you to review the offering documents and ask any questions before investing.  Investing in early-stage companies is highly risky, and tokenization may add another level of complexity and risk.  

Learn more about tokenization here.

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 may take even longer.

Can I sell my SAFE?

In general, you can only sell a SAFE after one year from the issuance date and only if you find a buyer, which might not be easy to do. Republic plans to work towards providing additional secondary market liquidity of SAFEs and other securities in the future.

Will my SAFE be converted in the company’s next round?

In the event of a future equity financing round that meets a certain threshold (usually $1 million), the SAFE automatically converts the investment into equity.

What if the company is using a custodian?

Learn more about what a custodial account is and how it affects your investment here.

Is every SAFE the same?

No. Republic has had multiple iterations of the SAFE, and multiple variations exist in the market generally. For example, historically, the SAFE was known as the Crowd SAFE or Nominee Crowd SAFE. It’s extremely important to review the specifics of the investment contract, especially if you have previously invested; put differently, do not assume that one company’s SAFE is identical to another company’s SAFE.

How can I discern between SAFEs? 

Each deal page will clearly indicate the type of security being offered by the issuer and a copy of such security instrument. Prospective investors are encouraged to review each security instrument to better understand the returns and risks associated with their investment. When reviewing each SAFE, you may note certain variables, such as qualifying conversion trigger events, Nominee designations, and options available to the issuer to defer conversion.

Disclaimer: Republic and each of its affiliates and affiliated persons expressly disclaims any responsibility for any consequences of using any version of the SAFE or any other document found on Republic’s website.

Risk Note: if no exit occurs, you may never get a return on your investment. If no subsequent equity financing or trigger event occurs, the SAFE will not convert and will produce no return for the investor, which may lead to a loss of invested principal.