Simple Agreement for Future Equity (SAFE)

A Simple Agreement for Future Equity (SAFE) is a type of financial instrument used by startups to raise capital from investors. A SAFE is designed to provide a simplified and standardized way to secure early-stage investments without determining an immediate valuation for the company.

In a SAFE agreement, investors provide capital to the startup in exchange for the right to receive equity in the company at a later funding event, typically during the next financing round, such as a priced equity round (e.g., Series A funding). Unlike traditional equity financing, a SAFE does not set a specific valuation for the company at the time of investment. Instead, it defers the determination of the company's valuation until the future funding round.

Key features of a SAFE include:

• No Valuation at the Time of Investment: Unlike convertible notes, a SAFE does not carry an explicit interest rate or maturity date. It allows startups to avoid setting a valuation when they are still in their early stages and when the valuation might be uncertain.
• Future Equity Conversion: At the next qualifying financing round, the SAFE converts into equity based on the terms specified in the agreement. The conversion is typically based on a pre-negotiated valuation cap or discount to the valuation of the priced round.
• Investor Protections: SAFEs may include additional provisions to protect the investor's investment, such as a "valuation cap" to limit the maximum valuation at which the SAFE can convert into equity or a "discount rate" to provide investors with a better conversion price compared to the future investors.
• Simplicity and Standardization: SAFEs are designed to be straightforward, simple, and standardized documents, making it easier and more efficient for startups to raise capital from multiple investors.