How a SAFE Works
A SAFE (simple agreement for future equity) is an agreement between an investor (in this case Uprise) and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment. The SAFE investor receives the futures shares when a priced round of investment or liquidation event occurs. SAFEs are intended to provide a simpler mechanism for startups to seek earlier stage funding than convertible notes or equity.
The basic mechanics are that the investor (Uprise) provides a certain amount of funding to the company at signing. In return, the investor receives a note that is redeemed for stock (equity in the company at a later date, in connection with specific, contractually-agreed on liquidity events. The primary trigger is generally the sale of preferred shares by the company, typically as part of a future priced fund-raising round. Unlike a straight purchase of equity, shares are not valued at the time the SAFE is signed. Instead, investors and the company negotiate the mechanism by which future shares will be issued and defer actual valuation. These conditions generally involve a valuation cap for the company and/or a discount to the share valuation at the moment of the trigger event. In this way, the SAFE investor shares in the upside of the company between the time the SAFE is signed (and funding provided) and the trigger event.
Unlike a convertible note, a SAFE is not a loan; it is more like a warrant. In particular, there is no interest paid and no maturity date, and therefore SAFEs are not considered debt on the books. This simplicity is the primary motivation of a SAFE. “Safes should work just like convertible notes, but with fewer complications”, according to startup accelerator Y Combinator. SAFE’s were first introduced in South Africa in 2014 and have been used by dozens of high growth, earlier stage companies so they are familiar to the legal community supporting the startup ecosystem.