SAFE is an acronym for Simple Agreement for Future Equity. It is an agreement between an investor and a company that provides rights to the investor for future equity in the company when triggering events occur. Usually the triggering events are when next equity financing is required and on sale of the company.
Such a triggering event may or may not occur and if it does not occur then investors may lose some or all amount invested in the enterprise.
SAFE was introduced by the Y combinator (a startup investor) in late 2013 as a source of funding for startups, since then it is used by many YC startups and non-YC startups.
SAFEs are so popular now among entrepreneurs, and many more aspects of it have contributed to its popularity, such as -
1. SAFE is quite similar to convertible notes, though it differs from convertible notes. Convertible notes are debt instruments, but SAFE is not a debt instrument.
2. It is a good option for obtaining funds at the very initial stage of startups, as more the funds available, the faster is the development of the enterprise.
3. SAFE does not include interest rate and maturity date, therefore the entrepreneur does not need to pay an extra amount to investors as in the case of loans.
4. Since SAFEs do not involve debt, entrepreneurs do not need to bother about debt and returns, and therefore it does not adds on to stress of an entrepreneur.
5. If a triggering event occurs, the entrepreneurs need not raise capital separately to return it to the SAFE holder, since the shares are given in exchange for the capital.
6. If an entrepreneur wisely distributes all the funds to all essential components, then such triggering event may never occur.
7. Easy and less documentation involved since maturity date and interest is not applicable.
8. SAFE is a simple agreement as it is named, it does not consume much time of either investor or of entrepreneur in customization of the agreement, like other agreements.
9. When an entrepreneur selects seed funding for his enterprise, he gets capital in exchange for equity. While a SAFE agreement does not provide investors with current equity stakes in the company, therefore the only entrepreneur controls his enterprise, without interference of investors' opinions; if any specific clause regarding it is not mentioned in the SAFE agreement.
10. It is a flexible agreement - the conversion terms, dissolution rights, and voting rights can be modified according to investors and the entrepreneur. Therefore entrepreneur may be answerable to the investor, depending on the terms and clauses enlisted in the SAFE agreement.
11. The SAFE investors get shares of the enterprise at a lower price than new investors. The discount percentage can vary depending on the type of enterprise.
12. In SAFE, shares are not valued while creating the agreement, this is better because valuation at an early stage of a startup is a difficult task.
SAFE has its benefits to fund a startup, though a plethora of other funding options are also available. Therefore, an entrepreneur should wisely decide an option that could be the best for his enterprise.
Related: Bootstrapping-Startup stage #1
Related: Seed Funding Stage #2
Related: Equity Based Seed Funding Sources
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