November 14, 2016
November 14, 2016
Although preferred stock or convertible notes are still the predominate choice for start-ups in seed and early-state financings, a relatively new financing instrument called a Simple Agreement for Future Equity (“SAFE”) has gained traction in the start-up ecosystem. A SAFE shares many characteristics with a convertible note, but is not technically a debt instrument. It is an investment contract that grants an investor the right to receive equity in the future following a “triggering event” (e.g., equity financing or sale of the company). Whether you are a start-up looking for financing, advising start-up clients during formation, or considering an investment in a start-up, a SAFE is worth looking into.
A SAFE is different from a convertible note in a few distinct ways:
The key terms of a SAFE are set forth below. It is important to note that not all SAFEs include each of these key terms, and many only include a valuation cap.
While a SAFE’s upsides are compelling, there are some risks that founders and investors should carefully consider:
A SAFE may help you, your client, or your investment partners streamline early-stage financings. But given their relative novelty, using them will likely require some education for all concerned parties. And to ensure they live up to their name, it is important to talk through your specific scenario with an experienced attorney before committing to a SAFE.
See: Startup Seed Financing Instruments: Convertible Notes and SAFEs, Practical Law, Practice Note W-000-5245. This blog post is provided for educational and informational purposes only. This information is not legal advice and no attorney-client relationship is formed. If you need legal advice, please consult a qualified attorney in your area.
Joe and Brett practice in the business law group at Briggs and Morgan, P.A., focusing primarily on mergers and acquisitions and venture capital. If you have any questions regarding SAFEs, please do not hesitate to email Joe at email@example.com or Brett at firstname.lastname@example.org.