Simple agreement for future equity

A Simple Agreement for Future Equity (SAFE) is a financial instrument used by startups to secure early-stage funding. It allows investors to receive future equity in exchange for capital provided upfront, without determining a specific share price at the time of investment. The shares are issued when a liquidity event, such as a priced fundraising round or acquisition, occurs. Unlike convertible notes, SAFEs do not function as debt instruments, meaning there is no interest accrued and no maturity date, simplifying regulatory compliance. The mechanics of a SAFE involve an investor providing funding at signing in exchange for future stock issuance tied to specific triggers, typically the sale of preferred shares in a future priced round. Valuation is deferred until the trigger event, with terms like valuation caps or discounts determining share allocation. This structure allows investors to benefit from company growth between the initial investment and the liquidity event. Introduced by Y Combinator in late 2013 as an alternative to convertible debt, SAFEs have gained popularity in the U.S., Canada, and Israel due to their simplicity and lower transaction costs. However, concerns exist regarding potential dilution for entrepreneurs, especially with multiple SAFE rounds preceding a priced equity round. Additionally, risks arise for non-accredited investors if companies fail to secure priced equity financing, leaving SAFEs unconverted. Institutional investors may also face exposure without standard protections like pro rata rights or liquidation preferences. Tax treatment of SAFEs is less favorable, as the holding period begins upon stock issuance rather than at the ...