SeedBlink Blog

Securing funding to grow your startup is sometimes essential. One financing instrument that has gathered attention is the Simple Agreement for Future Equity, mostly known as SAFE, originally introduced by Y Combinator.

SAFEs are now being cautiously adopted in Europe. But what exactly are SAFEs, and why are they beginning to capture attention in the European startup ecosystem?

This article explores the structure, benefits, and challenges of SAFEs. Founders will gain insights into whether this option aligns with their funding goals, while investors can better understand how to use this tool to diversify their portfolios.

What is a SAFE?

A SAFE is a type of convertible security that allows startups to raise funds without determining the company’s valuation immediately. In simple terms, an agreement between an investor and a startup grants the investor the right to future equity upon a specific event, such as a subsequent equity financing round or an acquisition.

Unlike traditional convertible notes, SAFEs do not accrue interest or have a maturity date, making them simpler and more flexible. Typically, SAFEs convert during a priced equity round at a discounted or valuation cap, which sets a maximum conversion price.

Key SAFE elements include:

• Investment amount: The funds provided by the investor.
• Valuation cap or “post-money valuation cap”: Sets the maximum valuation at which the SAFE converts into equity.
• Floor valuation: While a valuation cap sets an upper limit on a startup's valuation, the floor valuation sets a lower limit.
• Discount rate: A percentage discount is applied to the valuation during conversion.
• Conversion event: The trigger for equity conversion, such as a priced round or acquisition.

A SAFE contract also outlines investor and founder rights and priorities regarding the “trigger event.” It can also contain a “stop date.” When no trigger event occurs, the investor has the right, but not the obligation, to convert the SAFE into capital stock according to the floor valuation.

If multiple SAFEs are issued to different investors, they may convert at different caps and thus yield different prices per share. In syndicated rounds, investors typically contribute collectively to a single SAFE instrument.

The appeal of SAFEs

The allure of SAFEs lies in their simplicity and efficiency. For early-stage startups, mainly those in the pre-seed and seed stages, SAFEs offer a streamlined fundraising process by postponing valuation discussions to a later stage, often when the company has more traction.

Advantages of SAFEs:

• Quick and cost-effective to implement.
• Minimize immediate financial obligations for startups by eliminating repayment terms.
• Allow startups to delay valuation discussions until a future round when they have more data to support higher valuations.

Limitations of SAFEs:

• Provide no guarantees for investors unless a triggering event occurs.
• It can result in significant founder dilution if future valuations are much higher than expected.
• May be less appealing to investors who prefer structured terms with interest or repayment guarantees.

SAFEs in the European context

While SAFEs are a staple in U.S. startup financing, their adoption in Europe has been more cautious due to diverse legal frameworks. However, as Europe’s startup ecosystem matures, the use of SAFEs is expanding, supported by country-specific adaptations such as:

• BSA-AIR - Bon de Souscription d’Actions – Accord d’Investissement Rapide (France)
• SLIP - Simple Agreement for Future Equity (Norway)
• WISE - Warrant for Investment in Startup Equity (Sweden)
• ASA (Advance Subscription Agreement) also known as SeedFAST (UK).

While SAFEs are not yet ubiquitous across Europe, they represent a promising, flexible fundraising tool for startups navigating the complexities of early-stage financing.

When to use a SAFE?

SAFEs can be an ideal solution for startups and investors in specific scenarios:

1. Early-stage startups needing a fast and simple fundraising round

For pre-seed or seed-stage startups, SAFEs provide a fast and straightforward way to raise capital without the need for lengthy valuation negotiations.

2. Bridge rounds between larger funding rounds

Although convertible notes are more commonly used in bridge rounds, SAFEs also provide a flexible solution for maintaining momentum when preparing for a larger financing round but needing temporary capital.

Key considerations for founders:

• SAFEs in early-stage or bridge rounds often include valuation caps or discounts to reward investors.
• For bridge rounds, founders should ensure that a future funding round is immediately on the horizon to avoid conversion delays, which could frustrate investors.
• Expect existing investors to participate in a SAFE for a bridge round, rather than new investors.

Example - A pre-seed startup raising with a SAFE

GreenySprout, a pre-seed startup developing sustainable agriculture technology, illustrates how SAFEs can simplify fundraising.

Funding goal: Raise €500,000 to develop a prototype and expand marketing.

Let's explore GreenySprout's SAFE conversion scenarios.

Initial SAFE terms:

• Investment amount: €500,000
• Valuation cap: €3M
• Discount rate: 20%
• Next round minimum: None specified
• Assumed initial shares: 1M
• Conversion event: The next priced equity round or acquisition.

How SAFE Discounts Work

Important: The discount applies to the price per share, not to the valuation. This is a crucial distinction for accurate calculations.

Scenario 1: Next Round at €5M pre-money Valuation (Above Cap)

When the valuation cap protects investors:

1. Regular price per share at €5M valuation: €5M ÷ 1M shares = €5 per share
2. Cap price per share: €3M ÷ 1M shares = €3 per share
3. Investor gets better of: Cap price: €3 per share (better) & Discounted price: €5 × (1 - 0.20) = €4 per share
4. Final calculation: Shares issued = €500,000 ÷ €3 = 166,667 shares & Ownership = 166,667 ÷ (1M + 166,667) = 14.3%

Scenario 2: Next Round at €2M pre-money Valuation (Below Cap)

When the discount provides better terms:

1. Regular price per share at €2M valuation: €2M ÷ 1M shares = €2 per share
2. Cap price per share: €3M ÷ 1M shares = €3 per share
3. Investor gets better of: Cap price: €3 per share & Discounted price: €2 × (1 - 0.20) = €1.60 per share (better)
4. Final calculation: Shares issued = €500,000 ÷ €1.60 = 312,500 shares & Ownership = 312,500 ÷ (1M + 312,500) = 23.8%

Scenario 3: Next Round at €3M pre-money Valuation (At Cap)

When valuation equals the cap:

1. Regular price per share at €3M valuation: €3M ÷ 1M shares = €3 per share
2. Investor gets better of: Cap price: €3 per share & Discounted price: €3 × (1 - 0.20) = €2.40 per share (better)
3. Final calculation: Shares issued = €500,000 ÷ €2.40 = 208,333 shares & Ownership = 208,333 ÷ (1M + 208,333) = 17.2%

Key Points About Calculation Methodology

• Always calculate price per share first
• Apply discount to price per share, not valuation
• Compare discounted price with cap price
• Use the lower price per share (better for investor)
• Calculate shares based on investment amount divided by chosen price

Impact Analysis

For Founders:

• Most dilutive: When the discounted share price is lowest (€2M scenario - 23.8% dilution)
• Moderate: When at cap but discount applies (€3M scenario - 17.2% dilution)
• Least dilutive: When cap price is used (€5M scenario - 14.3% dilution)

For SAFE Investors:

• Best outcome: Lower valuation with discount applying (€2M scenario)
• Protected by: Cap in high valuations, discount in lower valuations
• Always gets better of: Cap price or discounted price per share

Pro Tips for Founders:

• Calculate impact on price per share, not valuation
• Model multiple scenarios before setting terms
• Consider cumulative impact of multiple SAFEs
• Document calculation methodology clearly
• Keep cap table updated with potential conversion scenarios

Recap: Why SAFEs are gaining traction in Europe

• SAFEs offer a simple and flexible fundraising option, allowing startups to:
• Raise capital quickly without determining an immediate valuation.
• Focus on growth while deferring complex negotiations.
• Access investor-friendly terms that compensate for early-stage risks.

As Europe’s startup landscape evolves, the adoption of SAFEs is expected to grow. By fostering collaboration between startups, investors, investment and equity management platforms, and legal professionals, SAFEs can become a powerful tool for innovation and growth.

Raise your next round with SeedBlink

If you're an early-stage startup exploring SAFEs or unsure which are the right funding tools for you, SeedBlink is here to guide you.

With SeedBlink, you gain access to:

• Expert guidance on preparing for fundraising and structuring deals, including SAFE agreements.
• Comprehensive infrastructure to facilitate your SAFE, CLA or equity round, covering investment vehicles, contracts, signatures, banking transfers, and KYC/AML verifications—ensuring a secure and seamless financing process while you focus on growing your business.
• Dedicated support throughout your funding journey, from preparation to closing.
• Post-financing tools for reporting, investor communication, and ongoing mentorship.

Apply for funding > https://tech.seedblink.com/financing-solutions