What is a SAFE in financing?

What is a SAFE in financing?

A SAFE is an agreement to provide you a future equity stake based on the amount you invested if—and only if—a triggering event occurs, such as an additional round of financing or the sale of the company.

What is a standard SAFE Agreement?

A safe is a Simple Agreement for Future Equity. An investor makes a cash investment in a company, but gets company stock at a later date, in connection with a specific event. A safe is not a debt instrument, but is intended to be an alternative to convertible notes that is beneficial for both companies and investors.

How does a SAFE contract work?

A SAFE is an investment contract between a startup and an investor that gives the investor the right to receive equity of the company on certain triggering events, such as a: Future equity financing (known as a Next Equity Financing or Qualified Financing), usually led by an institutional venture capital (VC) fund.

Is a SAFE debt or equity?

SAFEs serve as a placeholder for an equity investment in the company’s next equity financing. For startup founders, SAFEs are beneficial because they do not act like debt instrument – they do not accrue interest and do not have a maturity date.

What is the difference between a convertible note and a SAFE?

The most significant difference is that SAFE notes prescribe a specific conversion method while convertible notes offer varying conversion terms. SAFE notes convert into the next round of preferred stock that the company issues in the subsequent priced financing round.

Is a SAFE agreement a loan?

Unlike a convertible note, a SAFE is not a loan; it is more like a warrant. In particular, there is no interest paid and no maturity date, and therefore SAFEs are not subject to the regulations that debt may be in many jurisdictions.

What happens if a SAFE never converts?

If the company never decides to raise again, the SAFE will continue in perpetuity without ever converting. Like most convertible equity notes, SAFEs grant investors the right to receive a certain number of shares in a future priced funding round.

Are SAFEs considered securities?

SAFEs are considered to be securities, like stock and convertible notes, and are thus regulated by the SEC under the Securities Act of 1933 and Securities Exchange Act of 1934. SAFEs do not provide investors with voting rights until/unless the investment converts into preferred equity.

Are SAFEs taxable?

A SAFE Should Not Be Treated as Debt for Tax Purposes Many instruments bear indicia of both debt and equity. For example, in certain circumstances, convertible debt may be treated as equity for tax purposes. However, it seems clear that a SAFE should not be treated as debt for U.S. federal income tax purposes.

Is SAFE convertible debt?

SAFE notes are not debt; they’re convertible equity. There’s no loan or maturity date involved.

What is a SAFE liability?

Environmental or Safety Liability means any claim, demand, loss, obligation, action, accusation, allegation, order, damage, injury, judgment, penalty, fine, cost of enforcement, cost of remedial or corrective action, or any other cost or expense whatsoever, including reasonable attorneys’ fees and disbursements.