Overview of a SAFE Agreement
What is a SAFE Agreement?
A SAFE Agreement is a contract by which an investor makes a cash investment into a company in return for the rights to subscribe for new shares in the future.
Under a SAFE Agreement, the investment is converted into equity when there is an “equity financing”, a “liquidity event”, or “a dissolution event”.
Contrary to a Convertible Note, a SAFE Agreement does not carry interest, does not expire, and does not specify a minimum amount of funds to be raised at the equity financing.
Why are SAFE notes not safe for entrepreneurs?
A SAFE agreement is similar to a convertible note because both entitle the investor to receive shares in the future at a preferential price. However, these two instruments are fundamentally different because a convertible note is a debt but a SAFE is not. There might be chances a SAFE will never convert into equity and investors won’t get back their money.
What are the differences between a SAFE agrement and a Convertible Note?
A SAFE is a contract between an investor and a company, through which an investor invests into a company in return for future equity shares with no specific deadlines. Whereas a Convertible Note is a debt instrument that converts into equity under predefined conditions, typically in qualified financing, at a liquidity event, or on the maturity date. These are the main differences between a SAFE and convertible note.
- Convertible Note has a maturity date upon which, if the conversion doesn’t take place, the company will return the investment amount to the investor, but a SAFE does not.
- Convertible Note carries interest, but a SAFE does not.
- Convertible Note identifies the minimum amount of funds to be raised at the equity financing, but a SAFE does not.
What are the advantages of raising capital through the SAFE Agreement?
A business can raise capital through different means however raising it through a SAFE has several benefits like:
Easy to negotiate: Raising capital through a SAFE is quick and easy to negotiate because there are very few legal formalities involved. Businesses don’t have to worry about valuation cap or other debt elements, a simple self-explanatory SAFE document is enough to raise the capital.
Not interest-bearing: A SAFE is not interest-bearing so there is no extra work needed to convert the interest into equity.
No fixed term: Unlike other capital raising instruments, a SAFE doesn’t have any fixed term so there is no need to worry about the deadlines. If the company never reaches the trigger event, no shares are issued.
A SAFE Agreement is designed to be simple and short. It saves you the trouble of negotiating and agreeing on the amount of equity financing, which is often quite difficult to agree upon between the investor and the company at an early stage of the business.
You Might Also Like
Along with this document, make sure you see these other templates in our library:
The Zegal Template Library
Zegal's template library represents a complete and curated list of essential and premium business templates that can be used directly, for everyday business needs. Importantly, whether you're a startup or a larger enterprise, you will find that our Zegal automation solution allows anyone to create a legal agreement, any time, anywhere. All without a need for an expensive lawyer. Why do we do this? Well, we think that running your business day-to-day is important, and having these templates at your fingertips allows you to not miss a beat!
Lawyers draft and curate all of our legal templates for ease of understanding using plain English. Just fill out our guided questionnaires, and we will create the contract for you. Using our patent-pending expert rules engine, we automate the creation of complex legal contracts.
Try it for free today!