Simple Agreements for Future Equity (SAFE)
The SAFE is generally seen as a more company-friendly alternative to the issuance of convertible notes in an early stage debt financing and is intended for use in friends and family and angel rounds. Mechanically, a SAFE is a short, five page investment contract between the company and the investor under which the investor has the right to receive equity in the company on the occurrence of specified events. These events could include a future round of equity financing or an exit event such as a sale of the company. The SAFE is considered company friendly in the sense that it lacks a maturity date that would trigger a renegotiation of terms in the event the company needs an extension of the term. The SAFE also does not accrue interest, but provides upside to the investor in the form of a discount rate and valuation cap.
While the SAFE could be a viable alternative to the convertible note, the extent that they will be adopted widely for use will depend on whether investors can get comfortable with their use and risks. Namely, if the company is unable to raise additional funds, the SAFE will be outstanding indefinitely and the investor will lack the recourse that debt would otherwise provide. In this respect, unless the start-up has the leverage in negotiating the investment or the investors are willing to use the SAFE, the traditional convertible note will likely continue to be the financing instrument of choice between the two options for the foreseeable future.
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