When You Use It

Simple Agreement for Future Equity (SAFE) is a popular financing tool for early stage startups. It allows startups to bring cash into the company and defer shareholder documentation with investors until later investment (which is usually a larger investment). SAFEs are a “convertible instrument” which means they are essentially a loan that converts into shares at a time in the future.

Startups using SAFEs should ensure that they get advice to clarify the conversion mechanisms, the timing of conversion, the impact of pre- and post- money valuations, pre-emptive rights and other moving parts so there are no surprises when the time comes to issue shares. SAFEs don’t give investors the same rights as shareholders, and so often equity-like rights are negotiated by investors.

A SAFE is usually negotiated and executed without a term sheet.

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