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, Silicon Valley startup lawyer and leader of Orricks Global Tech Companies Group

SAFE means Simple Agreement for Equity. We coined the name for this new instrument when getting together with Y Combinators Jon and Carolynn Levy as the instrument was being developed in early 2014. The SAFE was first rolled out to YC companies on Clerky in YCs Winter 2014 class. Since then it has become the predominant method for YC companies to raise their first seed capital. And, by using the SAFE they have raised capital at virtually no legal cost – the SAFE is a 4 page document! And, hundreds of millions of dollars of capital have gone into startups already using SAFEs. Shortly after the SAFE was created 500 Startups developed their version, called the KISS (Keep It Simple Security). Great flattery!

The YC form of SAFE can be found on YCs website at

The SAFE comes in a variety of forms, but the most popular is the SAFE with a cap and no discount. In my experience 75% of all SAFEs are a cap with no discount, and the other 25% have some form of discount.

The SAFE is a convertible equity security as opposed to convertible notes, which are convertible debt securities. The SAFE has all of the advantages of notes but not the disadvantages.

1.No Maturity Date. Unlike convertible notes, founders and their companies are not require to pay the money back because SAFEs do not have a maturity date, unlike notes. Most notes have a maturity date of 1 year.

2.No Interest Rate. In addition, SAFEs dont require companies to pay interest because SAFEs are not debt. Most investors dont make seed investments in startups for an annual interest payment, so doing away with an interest bearing security makes sense.

3.No Issue with Lending Laws. Some states, including California, require lenders to have a lending license. The problem with convertible notes, is that investors who regularly make these investments may be required to obtain a lending license. The SAFE avoids this issue because the SAFE is not debt.

Like convertible notes, SAFEs work the following way and have the following advantages:

1.Cap the Price. Investors want to lock in their economics by knowing what percentage of the company they will own as a result of their investment. A SAFE with a cap means that the investment will convert in the companys next equity financing at a price not to exceed that cap. For example, if an angels put $500k into a company at a $4.5M valuation cap, they are locking in 10% ownership ($500k/($4.5M + $500k) = 10%). Of course, this ownership will be diluted by the future equity round, but this is the same result if the investment had been made initially as preferred stock rather than using the SAFE. If the companys Series A pre-money valuation is $9M, then the SAFE converts into Series A at the $4.5M pre-money valuation, which means the SAFE holder is receiving Series A for 1/2 the price, reflecting the economics they negotiated. For most early stage companies, I see valuation caps in the range of $5M to $8M.

2.Receive the Best Preferred Rights.The SAFE enables the investor, who must be an accredited investor, to buy a seat at the table without having to negotiate the 20-30 different terms that go along with making a preferred stock investment. Why not leave that job to the future VCs who are professionals at negotiating the terms of their preferred stock? The benefit to the SAFE holder is that they can piggy back off of the future negotiating skills of the VCs who lead the Series A round. This is because the SAFE will convert into exactly the same Series A preferred as the company sells to VCs in its financing. The SAFE holder will receive all the rights of the Series A preferred investors, including pro rata rights on the Series B round. The SAFE also does away with the problem that many convertible notes had which was phantom liquidation preference. When the SAFE converts into Series A at the $9.5M pre-money valuation using the above example, the SAFE holder receives 2x the number of shares of Series A as the VC, but the SAFE holder does not get a 2x liquidation preference ($500k x 2), instead the SAFE holder gets a liquidation preference in the Series A (via a shadow Series A-1) that has a liquidation preference of $500k. As a result, the company spares having an additional $500k of phantom liquidation preference on its books that no one paid for. Companies only wit investor to have a liquidation preference equal to the actual cash invested in the company.

3.Raise Money Only When You Need To.With SAFEs companies can raise money along their companys value growth curve. Historically, when companys raised their first equity as Series A, they would sell at least 25% of the company at a low valuation at one time. Because the valuation was low, they didnt raise much cash for the 25% investment, but they suffered significant dilution in this one financing event. With SAFEs, companies only raise the cash they need at the times the need it. And, as the value of the company grows, they can raise more capital using SAFEs at incrementally higher valuations. This is the most optimal way to raise capital because it minimizes dilution. For example, a company that is in R&D mode can raise its initial $500k in SAFE capital at a $5M cap. When the company then launches its product, and achieves this milestone, it can raise an additional $500k at a $10M cap. When the launched product has gotten some traction and positive feedback in the market, the company can then raise an additional $500k at a $15M cap. After this traction continues, the company can then complete a Series A financing at a $20M pre-money valuation. The founders minimized dilution by taking in capital at incrementally higher valuation, then if they had raised the full $1.5M at a $5M pre-money valuation.

4.Raise Money at Virtually No Legal Cost.The SAFE is a 4 page document. And, thanks to YC, the YC forms of SAFE are standards in the marketplace that all companies can use. Because thousands of investors, including VCs, have invested using the YC SAFE, new companies that use this form should encounter little negotiation from their investors. If the investors push back in a significant way, then thats a red herring that the investor is probably not making many investments Silicon Valley style.

5.Acquisition. If the company is sold prior to the equity round, since the SAFE has not converted, the SAFE holder will be entitled to either their money back, or what they would have received had the SAFE converted at the valuation cap. Its the investors choice.46.8k viewsView 106 UpvotersThank you for your feedback!Your feedback is private.Is this answer still relevant and up to date?

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