"Safes should work just like convertible notes, but with fewer complications", according to startup accelerator Y Combinator.
A Simple Agreement for Future Equity (SAFE) otherwise known as a SAFE Note is a convertible loan (like a convertible note) without the debt element, that serves as an investor agreement with a company, in which, in exchange for a payment by the investor to the company, the investor receives the right to receive equity (safe shares or safe securities) in the company when a pre-agreed trigger event occurs.
In this document, the trigger event is an equity fundraising event or series of events by the company for the principal purposes of raising capital.
Unlike a convertible note or other convertible instruments, a SAFE Note does not include a debt element nor a fixed maturity date, and interest is not charged.
In our SAFE Note you can specify the following SAFE-specific terms:
1️⃣ Valuation cap – sets the ceiling price per share the investor will pay when their payment converts into equity;
2️⃣ Discount rate – specifies the discount the investor receives on the price that other investors pay in the equity fundraising event; and
3️⃣ Most favoured nation – an MFN clause allows the investor to elect to inherit more favourable terms that are offered to any subsequent investors;
4️⃣ Where a valuation cap is included, you can choose to use either a pre-or post-money valuation;
5️⃣ The minimum value of the equity fundraising event to trigger conversion;
6️⃣ The type of shares issued to trigger conversion; and
7️⃣ The permitted purpose of the investors’ payment.
This investment vehicle has since become popular in the U.S., Canada, and Israel, due to its simplicity and low transaction costs.
However, as use has become more prevalent, concerns have emerged as to its possible impact on entrepreneurs, especially where multiple SAFE investment rounds are done prior to a priced equity round, as well as possible dangers for non-accredited crowdfunding investors who might invest in SAFEs of companies that realistically will never obtain VC financing, and therefore never trigger a conversion into equity.
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