<aside> 📓 SAFE - a form of financing (like warrant) that allow investors to convert their SAFE into equity in the event of a priced financing round or liquidation event. Created by Y Combinator.

</aside>

Intro:

• SAFE stands for "Simple Agreement for Future Equity", introduced by Y Combinator in 2013.
• Typically, SAFEs are used in early-stage unpriced rounds, such as pre-seed and seed. Investors use them to avoid valuing a company until later, thereby avoiding a lengthy and costly legal process and enabling faster funding.
• When a startup issues a SAFE, the amount received from the investor is recorded as a liability on the balance sheet, and the startup also creates a corresponding entry in its equity section to reflect the right to issue equity at a later date.
• SAFEs differ from convertible notes as they aren't debt instruments and are simpler and shorter, providing benefits for founders and investors.
• Unlike convertible notes, SAFEs don’t have Maturity dates, Interest rates and a minimum amount raised for a priced equity round to trigger conversion.

Structure:

• The terms of the conversion are usually determined by either a Valuation cap or a Discount rate:
  • Valuation cap. This is the maximum valuation at which SAFE will convert. The lower the SAFE valuation cap, the better the terms for the investors.
    • Types of Valuation Cap:
      • Pre money cap. The maximum valuation of the company before the investment takes place.
      • Post money cap = Investments + Pre-money Valuation Cap.
  • Discount rate. Instead of a specific valuation cap, a discount rate gives noteholders a discount to the valuation at the priced equity round when they convert. Usually it’s about 20-30%.
  • In the case of both Valuation cap and a Discount rate, the conversion rate will usually be the lower of the two options - a good outcome for investors, but YC has removed this SAFE type from their website so far.
• MFN (Most Favored Nation. No valuation cap or Discount: SAFE holders get conversion terms based on the most favorable terms offered to investors in the next priced equity round).

Facts:

• SAFE is the most founders-friendly investment vehicle for founders.
• New SAFEs investors do not dilute earlier SAFEs investors. All SAFEs will only dilute the existing shareholders on a priced round.
• In liquidation, SAFEs holders have two options: liquidation preference 1x or convert the note to common stock at the valuation cap price and sell the shares as part of the liquidation.