What is a Simple agreement for future equity (SAFE)
A simple agreement for future equity (SAFE) is a contract between a startup and a potential investor. The investor agrees to invest a certain amount of money into the company in exchange for a certain percentage of equity in the company. The contract may be made as part of a later, more formal funding round, but it need not be, and can be signed before the company is incorporated.
SAFEs are made between parties that have not yet established a relationship and do not yet have a track record of working together. The idea behind SAFEs is that no formal paperwork is needed until the actual investment is made. SAFEs are sometimes called "friend of a friend" notes, referencing the fact that they are used by investors and founders who have a connection with each other but are not yet formal business partners. SAFEs are sometimes used as a bridge between an angel round and a Series A round of investment.
A SAFE is not a security, but it may be treated as one by a government regulator. A SAFE is basically a simple, short term loan. It is an agreement by the investor to invest a set amount of money in the company in exchange for a certain percentage of the company's equity. SAFEs are often included in an investors' "deal flow", meaning that they are used in the same way that an investor would use a term sheet. SAFEs can be considered a non-binding form of investment.
An investor who uses a SAFE will typically also use a term sheet to document their investment. A SAFE is not a formal contract and does not have to be signed by an attorney. The term sheet for an equity investment will typically include a section that covers the SAFE and explains how the terms of the SAFE may change when a more formal agreement is made.
A SAFE is often used because it saves time and money for the investor and the startup. It also gives the investor an opportunity to do a little due diligence without making a formal investment. The investor can evaluate the company without having to spend the time and money needed to do a full investment. Since a SAFE is non-binding, the investor can choose to invest in the company at a later date. The SAFE can also serve as a catalyst for the investor and the startup to enter into a formal investment agreement. The SAFE will typically last for a short period of time. The two parties may agree to continue to work together, or they may agree to part ways.