What Does Raising On A SAFE Actually Mean?

A SAFE (Simple Agreement for Future Equity) is a contract between a company and investor. Put simply, it allows them to raise money under the promise that they will get shares in the company at a later date.

But how does it work? and why is it a popular fundraising method for startups? We take a look…

 

What Is A SAFE?

 

A SAFE (Simple Agreement for Future Equity) is basically a contract between a startup and an investor. The investor provides capital now and in return, they get a promise of shares when certain events happen. For example, it might give them a discount in future funding rounds or shares if the company gets acquired.

In short, it’s simply a ‘promise of shares’ not shares upfront.

And the best part? It makes the fundraising process easier for early-stage startups.

There’s no need to set a valuation straight away, no need to release equity before they’re ready and the money is available now, helping them grow. Additionally, given it’s not a loan, there’s no debt, meaning startups can grow at their own pace without worrying about paying it back by a certain date.

 

How Did SAFEs Come About?

 

Now you might be thinking: this sounds an awful lot like a loan. But actually, one of the reasons SAFEs were creates is because the normal ‘loan’ model didn’t actually work for startups. The debt, interest and deadlines meant startups couldn’t grow as quickly, and companies were finding it difficult to raise their first round.

In response to this, in 2013, Silicon Valley accelerator Y Combinator introduced the SAFE as an option. It was a faster and easier way for startups to raise capital when they were too early-stage for official valuations.

Since then, SAFEs have become a common way for startups to raise pre-seed or seed funding.

 

Key Elements Of SAFE Agreements

 

Whilst the process of providing an investor with an ‘IOU’ sounds relatively simple, there are a few key terms to be aware of:

 

Valuation cap

This is the maximum valuation you can hit before the investor gets to buy in. This means that if your valuation soars, early investors are still protected to a certain level.
 

Discount

The discount at which they will be able to buy shares at a later price.

 

MFN (most favoured nation)

This means that early investors are able to get better or equal terms than future investors. So if a new SAFE round is raised later down the line with better terms, early investors are able to access these too.

 

Qualifying round

The round that will trigger the conversion of SAFE funds to shares, usually the first official fundraising round.

 

Exit event

A clause that means that if you sell your company before the qualifying round, the SAFE investor can choose to either get their money back or convert into shares to benefit from the sale.

 

 

How Does A SAFE Actually Work?

 

To show you how it works in practice, it’s probably best to use an example.

Say you have a startup that is raising £100,000 from angel investors using SAFE.

The terms of the SAFE include a £3 million valuation cap and a 20% discount on future raises.

2 years later, you raise your Series A at a £5 million valuation.

In this case, instead of buying shares at a £5 million valuation like new investors, your SAFE investor gets a lower valuation cap (£3 million) and a 20% discount on the share price.

 

The Pros and Cons of SAFEs

 

Of course, raising on a SAFE isn’t always a good idea. Here are a few pros and cons to consider:

 

Pros

• Rounds can close quickly, most of the time in a matter of weeks
• Easy and low cost as they don’t involve a lot of legal work
• Ability for startup to scale without worrying about debt, interests or repayments

 

Cons

• If you are raising on different cap values and discounts, this might make share conversion messy at a later date
• Raising on a SAFE is all well and good, but raising multiple SAFEs could mean you’re giving away more of your company than you think
• The lack of clarity around terms and repayments mean many investors won’t be happy with SAFE raises and may wait to buy in at a later date

 

How To Use SAFEs To Fund Your Startup

 

Raising on a SAFE can be a great way for pre-seed or seed companies to raise money, and fast.

The benefits of SAFE raises is that they are fast, low maintenance legally and don’t require a formal valuation.

But they can also dilute companies quickly, especially if too many investors are bought on board or too many SAFE raises happen.

In short, SAFEs can be a great fundraising strategy, as long as they are used correctly.