What is a SAFE Note?
A SAFE or simple agreement for future equity note is convertible security that allows investors to purchase shares at a future price when the company raises more rounds. Y Combinator created the SAFE Note in 2013. Y Combinator is a seed-stage accelerator that helps technology companies to reach greater heights. A SAFE note acts as a legally binding promise to allow an investor to purchase a specified number of shares for an agreed-upon price at some point in the future. Essentially, SAFE notes are documents that early-stage companies use to help raise pre-seed or seed capital.
How SAFE Notes Work?
When starting a startup company, it's hard to assign value to the company since more information and data must be collected. The SAFE Note promises equity to an investor at a future date, allowing the issuer to postpone the valuation of a company to a date when they will be better able to value the company.
1. An angel investor provides seed money in exchange for a SAFE note (future equity).
2. The company uses the original investment to build the business.
3. Once progress has been made, you find another investor, giving your company what is known as post-money valuation.
4. You can then calculate the company's new price per share with this information.
5. After you know the price per share, you can convert the SAFE Note into the applicable number of shares in the company and distribute them to the SAFE investor.
SAFE Notes vs. Convertible Notes
SAFE Note overcomes many of the shortcomings associated with convertible notes. The most significant difference is that, unlike convertible notes, the SAFE notes are not debt and do not accrue interest. Though convertible notes are a bit more complex, both SAFE and convertible notes are:
- Helpful tools for startups who are trying to grow or scale their business.
- Converted to equity eventually.
Types of SAFE Notes
SAFE notes can be issued in four different scenarios:
- A valuation cap but no discount
- A discount, but no valuation cap
- A valuation cap and a discount
- No valuation cap and no discount
If you have questions about SAFE Note, contact us at firstname.lastname@example.org or call 212.213.8511
- Safe Note, Contracts Counsel, https://www.contractscounsel.com/t/us/safe-note#toc--key-elements-in-a-safe-note-
- SAFE Note - Definition, Pros and Cons, SAFE vs. Convertible Note, Buildd, https://buildd.co/funding/safe-note
- SAFE Notes: Everything You Need to Know, Upcounsel, June 19, 2020, https://www.upcounsel.com/safe-notes