Crowdfunding has become a popular choice for investors looking for something more personally aligned with their values or interests. Some issuers offer what is known as a “SAFE”, short for Simple Agreement for Future Equity. They are quite different from what is viewed as traditional common stocks and offer many benefits to you as a founder. Here we explain more about the SAFE option and how it can help you raise capital to grow your business.
What is a SAFE?
The SAFE is often compared to a warrant that entitles investors to shares in your company. However, where they differ from common stocks, is that investors don’t actually own a current equity stake in your company, because investors only receive shares once the terms of the SAFE are met. So you are actually selling a future equity stake that is only fulfilled following a triggering event such as the sale of your company. In fact, in most cases, the company has yet to have their initial public offering of securities. SAFEs are excellent options for companies, as you get the cash upfront and don’t really face the legal costs raised through traditional convertible debt or equity.
What are the Terms and Rights of a SAFE?
In hand with the event element of a SAFE, you set the terms and investors’ rights. This includes:
- Conversion terms: This is how the amount invested in the SAFE gets converted into equity.
- Repurchase rights: You can include a term that entitles you to the right to buy back an investment instead of the investor waiting for a more lucrative event to take place.
- Dissolution rights: This explains what happens should your company dissolve.
- Voting rights: Since investors don’t actually own equity in the company, they don’t have voting rights, but there could be a term that does allow them to have a voice in situations that pertain to the SAFE.
So, when creating a SAFE you provide agreeable terms for you, yet that won’t scare potential investors off.
Why Do People Choose a SAFE?
As the name implies, a SAFE is one of the simplest ways for people to invest in a young company. One of the big draws of crowdfunding is the idea of being one of the first to spot a potentially successful early-stage company. SAFEs are easy to use and also reasonably affordable, so can be invested in with minimal cost. It’s a good option for both single and group investors but comes with a lot of considerations due to the event element of the investment.
SAFE Note vs a Convertible Note
A SAFE note entitles investors to purchase a specific number of shares in your company at an agreed-upon price in the future. They tend to entitle investors to:
- Discounts: On average SAFE notes provide a discount ranging between 10% to 30% off shares when they become available.
- Valuation Caps: This term establishes the highest price that can be used when setting the conversion price.
- Most-Favored Nation Provisions: If you have more than one SAFE, this term allows investors to look at subsequent notes to see if they have more favorable terms so they can benefit from those terms.
- Pro-Rata Rights: Also known as participation rights, this allows note holders to invest extra funds to keep their percentage of ownership when there is future equity financing.
Convertible notes on the other hand usually have a maturity and interest rate because they are a form of debt designed to convert into equity when agreed-upon milestones are met.
How Are Safe Agreements Treated Under Securities Laws?
SAFEs are regulated by the SEC and are considered securities so treated like stocks and convertible notes.
Why Do SAFEs Matter to Startups?
SAFEs appeal to startups because they are easy to implement, don’t waste money on interest like a loan, and offer more flexibility to help raise funds. Some reasons to consider a SAFE include:
- Reduce or avoid debt that leads to insolvency
- Avoid paperwork and management associated with convertible notes, maturity dates, shareholders’ meetings, etc.
- Less legal costs than other forms of raising capital
- Not standardized so over more flexibility
- Control is not relinquished through voters rights
If you are looking for a new way to raise capital for your startup, SAFEs could be ideal.
