The SAFE - Sample Agreement for Future Equity - has become a popular money raising tool for entrepreneurs since being introduced by Y-Combinator in 2013. They're fashioned after but completely distinguishable from traditional convertible notes (where the investor is entitled to shares of company stock if the venture doesn't repay the loan by a deadline). A SAFE can be an effective fundraising tool. Entrepreneurs should know what they are, how they work, and their limitations.
According to Y Combinbator's Post Safe Money User Guide, it "is a simple, standardized document [with the] benefits of certainty and speed, and it . . . require[s] little to no transaction costs for companies and investors."
| WHAT TO KNOW | WHAT IT MEANS |
|---|---|
| SAFEs have only been around since 2013. | SAFEs were introduced by Y-Combinator in late 2013 as an alternative financing option for startups. They're designed to be easy-to-use, completely transparent investment vehicles. According to Y Combinator's Post Safe Money User Guide, it "is a simple, standardized document [with the] benefits of certainty and speed, and it . . . require[s] little to no transaction costs for companies and investors." While they make sense in some circumstances and have been embraced by many young entrepreneurs, there's no one-size-fits-all strategy for either entrepreneurs or investors. A SAFE may or may not work depending on your situation. |
| SAFEs have already undergone a major change in their short history. | In 2018, Y-Combinator introduced a major overhaul to the SAFE, switching the focus from pre-money valuation to post-money valuation. The math changed completely, showing the SAFE is a still-evolving process. That's not inherently problematic. But investors and founders both value security, risk-minimization, and transparency. Using new and still developing vehicles like SAFEs can introduce uncertainty. Traditional convertible notes have their drawbacks, but courts, lawyers, enterepreneurs, and investors have been using them for decades and know how they work. There's security in familiarity. |
| SAFEs were designed to streamline early investment. | SAFEs are an important (and, given their ubiquity, successfully implemented) tool for making business processes more accessible to founders and investors. As lawyers (members of one of America's most powerful cartels) aggressively block innovations that make business processes cleaner and more accessible, Y-Combinator's focus on simplicity, transparency, and efficiency are in line with what new ventures and their owners both want and need. The SAFE is a developing tool, but an important step in solving a big problem: A self-serving legal industry greedily maintaining barriers to quickly closing routine business transactions. |
| SAFEs are for life. | One big difference between the SAFE and the convertible note is the inability of the venture to "buy out" or avoid having to give the SAFE holder equity. A traditional convertible note provides an incentive to founders to repay the loan by a deadline so they don't have to give the lender an equity interest. With a SAFE, the holder automatically gets preferred shares when the next funding round is completed. |
| SAFEs aren't a panacea. | SAFEs are an excellent idea conceptually. They can simplify investing for both funders and founders and remove some transactional inefficiencies unnecessarily imposed by lawyers. But SAFEs aren't for everyone and every situation. Carefully consider the long term impact of any investment strategy. |