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There are many ways you can choose to raise capital for your startup. A SAFE note, or a Simple Agreement for Future Equity, is one option that is popular among early-stage startups. A SAFE note is a simple instrument that startups use to raise funding from investors in the early stages, before an equity raise. This article will detail the process of implementing a SAFE note to raise capital and the steps you and your investors may need to take when this SAFE note converts into equity.

What Is a SAFE Note?

A SAFE is an investment instrument that early-stage startups typically use before a full equity raise. Under the terms of a SAFE, an investor makes a cash payment to your startup company in exchange for a contractual right that the investment will convert to shares. This conversion will occur upon an agreed event. 

A SAFE typically contains two types of conversion events: a qualifying round and an exit round. A qualifying round is the closing of a priced equity round. An exit round is a liquidity event. Generally, an investor can choose to either receive their investment back or convert the investment into shares.

Investors will receive several shares when the SAFE converts. However, the number of shares will depend on the amount of investment (cash payment) they previously made and the share price of the priced equity round or liquidity event. A SAFE may also contain a valuation cap, which is a pre-agreed valuation of your startup company. At a trigger event, the investor will receive either the number of shares calculated on the round price or valuation cap, whichever is higher.

Additionally, a SAFE will contain a conversion price. This will generally be the price of shares at the time of a qualifying event or fair market value at a liquidity event. A SAFE often contains a discount rate that will be applied to the share price at the conversion event.

Benefits of Using a SAFE Note

A SAFE is a flexible investment instrument for your startup company. This is because a SAFE note:

  • contains no maturity date; 
  • is not a debt instrument; and 
  • has no interest rates attached. Hence, your company will have no overheads for bringing on this investment. 

Early-stage startups find this particularly attractive as it is quicker and more simple than a full equity investment. As investors are not shareholders, it also allows more control for you and other founders in the early stages of your startup.

SAFE Notes vs Convertible Notes

A SAFE is similar to a convertible note, but there is no debt element to a SAFE – it is not a debt instrument. Hence, investors money is not secured, and they may not receive their money back or a return on their investment if a conversion event is not reached. This type of investment carries more risk for investors than traditional equity investment. Setting a conversion price with a discount rate incentivises investors to make an initial investment in your startup company in exchange for a discounted share price at the conversion event once the business has developed.  

How to Implement a SAFE Note

When an investor has been found, a SAFE note is relatively simple to implement. You will need to negotiate the main terms of the investment with your investors, including questions like:

  • how much will they be investing;
  • what discount rate will you apply to the conversion price; and 
  • will there be a valuation cap? If so, what will this cap be?

Once you negotiate these terms, you can draft a SAFE note to reflect this agreement. A SAFE note will include all the essential terms you have negotiated with your investors. Additionally, it may include additional terms, such as:

  • what defines the conversion event;
  • what will happen if your startup goes into liquidation;
  • the rights of an investor; and 
  • any company and investor representations and warranties. 

A SAFE note is designed to be a simple agreement, written in plain English. It is generally 10 to 15 pages long.

Once you negotiate and draft your SAFE note, the investor and company must execute the document. You should also record the SAFE in your company’s cap table. Including the terms of the SAFE on the cap table is an important step. It allows you to keep track of your company’s percentage of ownership, before and after conversion events and share classes and shareholders of your startup.

What to Do at a Conversion Event

A SAFE note does not have an expiry date. Instead, you can draft your SAFE to terminate at a specific conversion event. When the event occurs, this will trigger the investment to convert into shares at the conversion rate as defined in the SAFE. Alternatively, your startup company can pay the investor back in full. 

At the time of a conversion event, you must take several steps to issue shares to the SAFE holder. Firstly, your startup will need to approve the issue of shares to the SAFE holder. Typically this is done through a board resolution by the company directors. You may also require consent from shareholders. 

You should review the terms of your shareholders agreement, which may contain clauses for the issuance of shares.

Next, the investor will need to sign your startup’s shareholders agreement or sign a deed of accession. Signing allows them to become party to the existing shareholders agreement. You will also need to update the members register to record the issuance of these shares. Finally, you will need to issue the SAFE holder with a share certificate for these new shares and notify the Australian Securities and Investments Commission (ASIC) that you have issued these shares.

Key Takeaways

A SAFE note, or a Simple Agreement for Future Equity, is one way your startup can raise funding from investors. In exchange for investors’ cash payment, your startup provides a contractual right that the investment will convert to shares upon an agreed conversion event. To implement a SAFE note, be sure to follow the correct process, including:

  • obtaining consent from your board of directors, and possibly shareholder consent;
  • having the investor sign a deed of accession;
  • updating the members register; and 
  • notifying ASIC.

If you have questions about SAFE notes or require assistance in drafting or converting a SAFE note, contact LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a SAFE note?

A SAFE note is a method of capital raising for your startup. When investors provide cash payments to your startup, you exchange a contractual right to them that their investment will convert to shares. In drafting your SAFE note, you and your investor will agree upon a conversion event.

What is a conversion event?

A conversion event is a specific event that triggers the SAFE to convert. When the event occurs, this will trigger the investment to convert into shares at the conversion rate as defined in the SAFE.

How do I implement a SAFE note?

To implement a SAFE note, the first step involves obtaining consent from your board of directors, and possibly your shareholders too. Next, you must have your investor sign a deed of accession or your startups shareholders agreement. You also need to update the members register. Finally you can issue the SAFE holder with a share certificate and notify ASIC.

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