What is a SAFE and Why Should I Care?

When diving into the world of startup funding, one quickly encounters the term “SAFE.” But what exactly is a SAFE, and why is it crucial for game developers, early-stage tech startups, and content creators to understand it?

What is a SAFE?

A SAFE, or Simple Agreement for Future Equity, is an investment contract between a startup and an investor. Introduced by Y Combinator in 2013, SAFEs provide a flexible and straightforward way for startups to raise capital without the complexities of traditional equity rounds. Unlike convertible notes, SAFEs don’t accrue interest or have a maturity date, making them simpler and more founder-friendly.

Key Features of SAFEs

  1. Conversion into Equity: SAFEs convert into equity at a future date, typically during a priced equity round like a Series A. The conversion is based on pre-agreed terms, such as a valuation cap or discount rate, ensuring that investors receive shares proportional to their investment.
  2. Valuation Cap: SAFEs typically have either a valuation cap, or a discount rate. The valuation cap sets a maximum company valuation at which the SAFE converts, protecting investors from excessive dilution.
  3. Discount Rate: Discount rates, by contrast, offer investors a lower price per share (based on a percentage) compared to new investors in the priced round, rewarding them for their early risk.
  4. Most Favored Nation: A less common provision that investors may ask for is a “Most Favored Nation” clause. This provision would amend the SAFE to match the most favorable terms that any other SAFE investor gets at the time of conversion. This provision can be an extra incentive to attract larger or more important investors.
  5. Simplicity and Speed: SAFEs are designed to be quick and cost-effective. They streamline the fundraising process, allowing startups to close deals faster and focus on growth rather than lengthy negotiations.

Why Should You Care?

Understanding SAFEs is vital for several reasons:

  1. Popularity: SAFEs are a very popular early stage investment vehicle.
  2. Efficient Fundraising: SAFEs allow a company to raise funds quickly without the need for many complex legal agreements. This efficiency can be crucial when racing against time.
  3. Founder-Friendly Terms: Unlike debt, SAFEs don’t burden the company with interest payments or looming maturity dates. SAFEs don’t generally come with a lot of strings attached in the way of governance burden, etc.
  4. Attractive to Investors: Some investors appreciate the clarity and simplicity of SAFEs. They’ve seen it before; it’s easy to review and move to close.
  5. Future Planning: Understanding how SAFEs convert into equity can help plan for future funding rounds and the impact of conversion on your company’s cap table and overall ownership structure.

In conclusion, SAFEs are a powerful tool in the startup fundraising toolkit. By grasping their fundamentals and benefits, founders will be better equipped to navigate the investment landscape, attract the right investors, and set their business on a path to success.

Brandon J. Huffman

Brandon is the founder of Odin Law and Media. His law practice focuses on transactions and video games, digital media, entertainment and internet related issues. He serves as general counsel to the International Game Developers Association and is an active member of many bar associations and community organizations. He can be reached at brandon at odin law dot com.

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