Posted by Early Growth
January 5, 2016 | 3-minute read (416 words)
Convertible debt is a staple in startup funding. But sometimes the complexity and costs outweigh the benefits. Enter the SAFE, or Simple Agreement for Future Equity. Designed for simplicity on the front-end, a SAFE allows a company to accept outside investment in exchange for stock issued at a later date.
SAFEs usually appear around the seed stage of funding, as it gives founders the chance to raise funding without having to begin the process of setting a valuation or issuing convertible notes. Because there is no debt component, SAFE agreements tend to favor the entrepreneur over the investor.
With that being said, there are important characteristics of a SAFE that you should know before asking your Accounting Professional if it is the right option for your company.
- SAFEs are not debt instruments
It’s right there in the name: Simple Agreement for Future Equity. Without the involvement of debt, there is less of an administrative burden, no interest payments and no maturity dates to manage. This is great for founders, but can expose investors to greater risk (see below).
- SAFEs are meant to be flexible and relatively quick
The SAFE was created as an easier way to offer equity without introducing investors as creditors. As a result, the paperwork can be relatively painless; SAFE documents are usually as simple as just a few pages and can be executed at a much lesser cost than a convertible note.
- SAFEs do not offer the same investor protection as convertible notes
With no debt agreements involved in a SAFE, investors do not have a maturity date (or interest payment) upon which to rely. SAFE investors are looking for an event such as an acquisition, IPO or subsequent round of funding to obtain a payback from the company. The risk is higher; as a warrant holder the investor is not entitled to any of the company’s assets in the event of liquidation.
- Your company must be incorporated in order to offer a SAFE
Your company must be incorporated - as opposed to an LLC - in order to properly offer a SAFE to investors.
As with any equity transaction, it is vital that you consult with your legal and accounting representation when considering a Simple Agreement for Future Equity. If you have questions about how a SAFE can work for your company - or if you are interested in a more traditional convertible note transaction - contact us
for a free 30 minute consultation.