In today’s world of start-ups and venture capitalism, many investors are looking to invest in companies that offer the potential for growth and high returns. As a result, simple agreement for future equity (SAFE) has become a popular way for start-ups to raise funds from investors. In this article, we will discuss what a SAFE agreement is and provide some examples of how it works.
What is a SAFE agreement?
SAFE is a legal agreement that allows start-ups to raise funds from investors without giving away any equity in the company immediately. Instead, the investor agrees to invest a certain amount of money, and in return, they receive the option to convert their investment into equity in the future. This means that the investor has the potential to earn a return on their investment if the company is successful.
Examples of a SAFE agreement
1. Valuation cap SAFE
A valuation cap is a common feature of a SAFE agreement. It is a maximum valuation that the start-up can have at the time of conversion. If the start-up is valued higher than the cap at the time of conversion, the investor’s shares will be converted at the lower valuation. For example, if the valuation cap is set at $5 million, and the company is valued at $10 million at the time of conversion, the investor’s shares will be converted at the $5 million valuation.
2. Discounted SAFE
A discounted SAFE is a type of SAFE agreement that offers a discount on the price per share at the time of conversion. For example, if the company’s share price is $1 at the time of conversion, and the investor has a 20% discount, they will pay $0.80 per share.
3. MFN (Most Favored Nation) SAFE
An MFN SAFE is a type of SAFE agreement that offers the investor the best terms possible in the event of a future financing round. This means that if the start-up raises funds from other investors at a better valuation or with better terms, the MFN SAFE investor will receive the same terms as the new investors.
SAFE agreements are a popular way for start-ups to raise funds from investors without giving away equity in the company immediately. With the examples provided in this article, you are now equipped with knowledge of the different types of SAFE agreements and how they work. If you are considering raising funds for your start-up, it is important to consult with a lawyer to ensure that your SAFE agreement is legally sound and protects your interests.