In short, to raise money with a Simple Agreement for Future Equity (SAFE) is a contract where an investor makes a cash investment in return for the rights to subscribe for new shares in future. Under a (SAFE), the investment converts into equity when there is an “equity financing”, a “liquidity event”, or “a dissolution event”.
Contrary to a convertible note, a SAFE does not carry interest, does not expire, and does not specify a minimum amount of funds to raise at the equity financing. A SAFE never expires. A SAFE is similar to a Convertible Note in that both entitle the investor to receive shares in future at a preferential price. However, the two instruments are different because the Convertible Note is a debt but a SAFE is not.
Fundamentally, to raise money with a SAFE is by design simple and short. It saves you the trouble of negotiating and agreeing on the amount of equity financing. Oftentimes, this is quite a difficult proponent to agree upon between the investor and the company at an early stage of the business.
Generally, you have four options for how the SAFE will convert into preference shares when an equity financing happens:
Price per preference share offer at the equity financing;
The price per preference share offer at the equity financing with a discount;
Thirdly, the price per share determines at a pre-negotiated valuation cap (see below); or
The lower of option 2 or option 3.
If you choose option 1 or option 3, the price at which conversion will take place is the “Safe price”.
For option 2, the price at which conversion will take place is the “Discount price”.
If you go for option 4, the price at which conversion will take place is the “Conversion price”.
Pro rata rights are the rights of the SAFE investor to purchase more shares in the company if the company raises a further round or rounds of financing. These rights are only exercisable after the SAFE converts into preference shares of the company at the equity financing.