When startups need to raise money, it is nearly impossible to have discussions with potential investors without discussing valuation and other performance indicators.
A SAFE Agreement is an investment instrument between a start-up and an investor that provides future rights to the investor to receive equity in the company on certain triggering events which are usually a future equity financing or the sale of the company. With more flexibility, less complexity and less transaction costs, SAFEs are intended to provide a simpler mechanism for startups to obtain initial funding when compared to convertible notes.
SAFE was introduced in 2013 by the startup accelerator, Y Combinator, and since then, many startups have used it as the main instrument for early-stage fundraising. While the original SAFE was based on a pre-money valuation, Y Combinator has now amended its form SAFE agreement to be based on a post-money valuation.
Typically, there are three material elements of the SAFE to negotiate with investors which are:
• the valuation cap;
• the discount; and
• a financing threshold at which the SAFE would covert.
It is important for founders to carefully consider how much equity they are willing to give up and it is important for investors to note that if there is no future equity financing and the company never gets sold the investors will typically not be able to trigger a conversion into equity.