A common investment vehicle used by founders to raise private capital at an early stage is the SAFE, or Simple Agreement for Future Equity. With no term or interest rate, and the investor not yet on the cap table (and no valuation necessary), a SAFE provides maxim flexibility to founders.
A simple agreement for future equity is a document memorializing a promise for future rights to equity in a company in exchange for a specific dollar amount (the investment).
Upon an equity financing, the SAFE will convert into the equity sold in that stock sale transaction. The SAFE may also convert upon the company's sale or simply be paid back when the company dissolves. SAFEs are distinguishable from convertible promissory notes in that there is no specified term, no interest rate and no pre-determined price per share.
The following figures demonstrate some of the standard terms utilized in SAFE documents.
Capital Stock refers to your issued and outstanding equity, change of control refers to a change in ownership of the company, and company capitalization is what your cap table looks like just before the sale of SAFEs.
Equity financing means the next round of financing where you sell your company's stock, IPO is Initial Public Offering, and a liquidity event is a change of control.
Allowing your SAFE holders the opportunity to maintain their equity position is referred to as pro-rata rights. SAFE Preferred Stock means the shares issued in the equity financing. Most favored nation, or MFN, provides your SAFE holders the opportunity to receive equal rights in future rounds of equity financing.
The more heavily negotiation terms of a SAFE are demonstrated in Figure 4. Valuation cap maximizes the price for the SAFE conversion. A discount is often provided to your SAFE holders for the conversion into preferred stock. In some SAFE rounds, warrants are offered with the purchase of the SAFE to incentivize the purchase and give the investor an opportunity to buy more shares in the future.
When is the appropriate time to use a SAFE? Early stage companies utilize SAFEs for their earliest financing rounds because of the simple terms within the agreement. A typical SAFE round of financing is between$25,000 to $250,000. Investors might be friends or family, and possibly angels too. For purposes of this post, we are assuming that all of your investors will be accredited.
Afissio guides clients through the SAFE process, initially with the preparation of a term sheet. Once the term sheet is finalized, we prepare the SAFE itself and include industry-specific risk factors as well as an accredited investor questionnaire. This is done to protect both the company and its SAFE investors.
For more info about SAFEs or other fundraising vehicles, contact us by emailing email@example.com.