If you're new to angel investing, you've probably come across the term "SAFE." But what exactly is a SAFE, and why is it gaining popularity among startup investors? In this post, we'll demystify SAFEs for you and give you all the essential info you need to navigate them.
SAFE stands for "Simple Agreement for Future Equity." The SAFE is a legal agreement between an investor and a startup that allows for an investment in exchange for the right to obtain equity in the company at a later date, typically during a future financing round or exit event.
Unlike traditional convertible notes, SAFEs are not debt instruments and do not accrue interest or have maturity dates. Instead, they provide investors with a promise of equity in the company if certain triggering events occur.
A SAFE converts into equity when specific predetermined events occur, such as a priced equity round or a liquidity event. This allows investors to benefit from the future success of the company.
Unlike traditional equity investments, a SAFE might not have a priced valuation at the time of investment. This simplifies the investment process and avoids potential disputes over the company's value.
A SAFE includes investor-friendly provisions that protect their interests, such as pro-rata rights, information rights, and sometimes even downside protection measures.
Startups and investors can negotiate various terms in a SAFE, including the discount rate, valuation cap, and conversion triggers. This flexibility allows both parties to tailor the agreement to their specific needs.
Before investing in a startup using a SAFE, it's crucial to consider the following:
SAFEs have emerged as a popular investment instrument in the world of angel investing. They provide a simplified approach for early-stage investors to support startups while deferring the valuation negotiation. However, both investors and startups should carefully evaluate whether a SAFE aligns with their specific goals and strategies.
Remember, every investment carries risks, and it's crucial to conduct thorough due diligence and seek professional advice before making any investment decisions. By understanding the basics of a SAFE and considering its benefits and considerations, you can make informed investment choices.