Question: What is a SAFE?Answer:
A Simple Agreement for Future Equity (referred to as a SAFE) is a capital raising mechanism under which an investor provides funds to a startup in return for a future right to convert their investment into shares in the company. The conversion will occur at specifically defined trigger events, generally an exit event (where the company sells its shares or assets, or lists on the stock exchange) or a qualifying round (where the company raises a round of capital in the traditional cash for shares sense (not via more SAFEs or convertible notes). A SAFE does not include any guarantee that the investor will be paid back if the company never reaches these trigger events. However, to reward the investor, it often contains discount at conversion so that the investor receives more shares for their money.
A SAFE is seen as an alternative to a convertible note. It notably doesn’t include the debt element (under a convertible note, the investment is considered a loan, this is not the case with a SAFE). There is no termination or maturity date and therefore if the startup does not make it to an exit or another round, the investor won’t get their investment back. There is no interest payable on the investment (because it is not a loan) and it is generally a very simple document to negotiate. Some SAFEs have the added complexity of a valuation cap but this is not a requirement.