YCombinator introduced the SAFE (Simple Agreement for Future Equity) in 2013 because they wanted to create a really easy way for founders to raise funding from angels and early-stage investors quickly without all of the admin and legal work of a more sophisticated priced round.
Founders at these very early stages are better spending time on customer development and building their product than jumping through the hoops of a fundraise. Likewise, early-stage investors (especially angels) are happy to follow these standardized terms in order to let the founders get back to business quickly.
SAFEs have quickly become ubiquitous at the early stages of fundraising because of how lightweight they are for both founders and investors.
What is a SAFE?
Effectively, investing via a SAFE confirms your participation in a future priced round. You get your equity when that round is raised. In order to reward investors for contributing capital in advance founders will either provide a valuation cap or discount (or both) on the future round.
Valuation Cap (or ‘Cap’)
This is the maximum price you will buy equity at when the priced round is raised. For example, if you invest via a SAFE with a $5MM cap it means that when the next round is raised, the highest price you will pay is a $5MM valuation even if the valuation is significantly higher at that time. If the fundraise is lower than the cap, you will pay at the lower rate.
Example:
ACME startup raises $250k from an angel investor at a $5MM cap. 6 months later they raise a formal priced seed round from a VC firm at a $20MM valuation.
Both the angel investor and VC get their equity when the priced round is closed, but the angel pays 25% of the price based on the terms of the SAFE.
Discount
Some SAFEs are ‘uncapped’ which means there is no valuation limit - in order to make the SAFE still compelling the founder will often offer a % discount on the future round instead (or in addition).
Example:
ACME startup raises $250k from an angel investor via an uncapped SAFE with a 10% discount. 6 months later they raise a formal priced seed round from a VC firm at a $20MM valuation.
Both the angel investor and VC get their equity when the priced round is closed, but the angel gets a 10% discount on the price of the round vs the VC.
FAQs
When do we get our equity?
We get our equity once a priced round is raised.
What happens if they never raise a priced round?
If they are acquired or go public then a safe holder is entitled to receive a portion of the proceeds equal to the greater of a return of its Purchase Amount and the as-converted proceeds it is entitled to in connection with a Liquidity Event (i.e., the proceeds it would be entitled to had its Purchase Amount been converted into common stock at the Post-Money Valuation Cap).
If they go out of business before raising a round, much like any other investment, we’d most likely lose any funds we contributed. There is more information about liquidation rights etc. in the guide below.
Closing
SAFEs are a great founder-friendly way for early-stage investors to invest in start-ups and be rewarded for investing ahead of formal priced rounds.
There is more to SAFEs than just these two variables, although these are key, to get fully up to speed I would recommend reading YCombinator’s guide.