What is SAFE?
SAFE stands for Simple Agreement for Future Equity.
SAFE is an agreement that grants the holder the right to equity at a potential future financing when the startup sells preferred stock.
It is intended to be fairer for both investors and founders.
It’s agreed by a vast number of investors and founders that a SAFE agreement is a better replacement for a convertible note. Unlike a convertible note, a SAFE agreement is not a debt instrument. As the money invested in a startup via a SAFE is not classified a loan, investment taken by founders will not accrue interest. This is a clear agreement between both parties as the investor never intended to lend money to founder and the founders didn’t intend to receive a loan.
Because of the SAFE’s 1 - 5 page security document, the elimination of all the complicated jargon rich terms for investors. Startups and investors will usually only have to negotiate one item: The valuation cap. Due to the SAFE not having any expiration or maturity date, there should be no time or money spent in dealing with extending maturity dates, revising interest rates or the like.
In a nutshell:
It was introduced by Y Combinator in 2013 (an American seed accelerator)
It’s fast to execute
No strict valuation required from founders
Intended to replace convertible notes
Very short and easier to understand (requiring less than 5 pages)
It’s not a debt instrument or a loan
Conversion to equity at a priced round