What Is Simple Agreement for Future Equity (SAFE)


Startup funding during the initial stages of the startup is crucial for the company’s survival in the long run. However, in most cases, startups during such early stages don’t generate revenue and often operate in a very risky business environment. This makes it hard for the investors to value such startups at the time of the investment.

But this doesn’t stop them from investing in potentially profitable startups. They invest using the concept of future equity – the investment amount converts into equity not immediately but upon the occurrence of future events or fulfilment of future conditions.

This is where Simple Agreement For Future Equity (SAFE) kicks in.


What is Simple Agreement for Future Equity?

Simple Agreement for Future Equity (SAFE) is an investment contract used to invest in early-stage startups in return for the rights to subscribe for new shares in future, usually at the next preferred stock financing.

To understand the concept better, let’s break the definition into three key-phrases –

  • Investment contract:  SAFE is not an equity or a debt. It is just a legal agreement where an investor invest in a startup in return of a right that he’ll get to subscribe for new shares in the company in future upon occurrence of certain events like – equity financing, a liquidity event, or a dissolution event.
  • Used to invest in early-stage startups: SAFE is used just to invest in early-stage startups when the valuation isn’t possible.
  • In return for the rights to subscribe for new share: Safe provides a safeguard for the early investors in the form of a right to subscribe for new shares in future.

Y Combinator introduced this concept of SAFE as an alternative to convertible note that acted as a debt to the startups who were required to pay interest on it.



Characteristics Of SAFE

SAFE is a distinct future-equity agreement with the following characteristics –

  • No expiration date – SAFE never expires. It only converts upon the occurrence of certain events like equity financing, liquidity event, or dissolution event. If such events don’t take place, SAFE continues to exist unless otherwise stated in the terms.
  • No Interest Rate – It isn’t debt, so it doesn’t bear any interest.
  • No qualifying equity round description – SAFE can convert at any equity funding round when the valuation of the business is possible. There isn’t any predetermined minimum qualifying amount to be raised at the equity financing for SAFE to be converted.
  • Deferred Valuation Clause – The valuation of the company is deferred to the future.
  • Issuance of shadow stock – The stock issued to SAFE investors is commonly called ‘shadow preferred stock’. It differs from the preferred stock (the “new investor preferred stock”) which is issued to the new investors at the time of preferred stock financing that triggers the SAFE conversion. Even though this shadow preferred stock is intended to have the same rights as that of new investor preferred stock, what differs is the liquidation preference, conversion price, and dividend rate of the shadow preferred stock. These are calculated based on the price per share of the shadow preferred stock instead of the price per share of the preferred stock offered to new investors.

SAFE is issued to the investor by the startup company. The founder is never required to pay back the money raised out of his personal assets.

How SAFE Works?

Suppose Mr X invested $ 50,000 in a startup through a SAFE. In two years, the startup went for another fundraising round from an angel investor who agreed to buy 10% of the company for $ 2M. The post-money valuation of the company comes out to be 20M.

Now, the pre-money valuation: Post-money valuation – new investment = 18M

Supposing the startup had 18,000,000 shares before the angel investor’s investment, the price per share comes out to be $ 1.

Supposing, the SAFE didn’t have any special terms in it, Mr X gets 20,000 shares of the startup he invested in.

However, SAFE usually comes with specific terms to give preference and benefits to such early investor.


SAFE Terms & Key Parameters

There’s more to just the simple definition of SAFE. Even though it’s not a loan like a convertible note, it does come with certain terms and key parameters that are similar to it.

Valuation Cap

It’s the maximum valuation at which SAFE can convert into equity. This is a way for the SAFE investor to get a better price per share than the investors who invest later.

By using a valuation cap, the investor fixes the maximum valuation at which SAFE can convert into equity. That is, if the cap is 5M and the company ends up raising money at a valuation of 10M, the investor is entitled to convert his SAFE at a share price equivalent to 5M.

Example: SAFE with a valuation cap but no discount

Let’ assume that startup XYZ raised its seed funding of $ 50,000 from an Angel investor, Mr A, by writing a SAFE with a $ 5M valuation cap and no discount.

Next year, the company went on to raise its Series A investment at a pre-money valuation of $ 10M at a price of $ 10 per share.


Now, even though the company is valued at $ 10 million, Mr A will be able to convert his SAFE into equity shares at the valuation of $ 5M. That is, he’ll get the shares at a price of $ 5 [5M/10M*10] instead of $ 10 per share, and will be able to convert his investment into 10,000 shares which would have otherwise cost him $ 100,000.


Discount

Sometimes, SAFE comes with a discount to woo early investors. SAFE discount is the valuation discount the investors offering a SAFE receive relative to the investors in the subsequent financing round. Such discounts typically range from 10–30%.

Suppose a SAFE is issued with a 20% discount. This means if the SAFE investor invested $ 40,000 in a startup whose price per share at the time of future investment comes out to be $ 10, he’ll get the share at a 20% discounted price, which is $ 8. This means he’ll get 5000 shares instead of 4000.

Example: SAFE with a valuation cap but no discount

Let’s assume that a startup XYZ raised its seed funding of $ 60,000 from an Angel investor, Mr B, by issuing a SAFE with a 40% discount.

Next year, the startup went on to raise its next investment at a pre-money valuation of $ 10M at a price of $ 10 per share.

Now, unlike other investors, Mr B, will get a 40% discount on this price per share if he wants to convert his debt into equity. This comes out to be $ 6 per share, and he’ll be able to convert his investment into 10,000 shares [60,000/6] which would have otherwise cost him $ 100,000.

Example: SAFE with both valuation cap and discount

In cases when both the valuation cap and the discount clause is included in SAFE, the investor weighs both the options at the time of valuation and converts his SAFE at the lowest possible rate.

Suppose XYZ LTD raised $ 50,000 from Mr C by issuing a SAFE with a $ 5M valuation cap and 40% discount.

If at the next funding round, the company is valued at $ 10M at a price of $ 10 per share, the 40% discount will convert Mr C’s investment at $ 6 per share.

The valuation cap, however, would result in $ 5 per share [5M/10M*10], which would be the actual price at which Mr C’s SAFE would convert to shares.

Most Favoured Nation (MFN) Clause

In some cases, a startup takes funding from more than one investors before actually going for a preferred equity funding round. To do this, it may also write two different SAFE to different investors. Now, a most favoured nation clause, or an MFN clause, keeps the later investors from getting better terms than the previous investors.

Suppose a startup raised an investment from Investor A by writing a SAFE. After a year, the company raised another investment from investor B by writing another SAFE but providing more favourable terms to him.

Now, the MFN clause allows investor A to elect to inherit any more favourable terms that are offered to investor B or any subsequent investors prior to the next equity round.


Pro-Rata Rights

Pro-rata right gives an additional right to the SAFE investor to participate in the subsequent funding round to maintain his/her ownership percentage in the company.

Suppose an investor bought 10% of a company in return for SAFE. In the subsequent round, if his/her share value dilutes because of the influx of new investment, (s)he can invest the amount required to regain his ownership percentage.


SAFE vs Convertible Note

While SAFE has reasonable benefits for entrepreneurs, many investors still focus on signing an IOU in the form of convertible notes.

SAFE Convertible Note
Is neither a debt nor an equity. Is a debt.
Doesn’t carry an interest rate. Carries an interest rate.
Doesn’t carry a maturity date. Carries a maturity date
Doesn’t carry a minimum threshold for qualified financing. Carries a minimum threshold for qualified financing.

In essence, SAFE notes mean less risk for the founder and more risk for the investor, and it’s the total opposite when it comes to the convertible notes.


Go On, Tell Us What You Think!

Did we miss something? Come on! Tell us what you think about our article on simple agreement for future equity (SAFE) in the comments section.

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Equity Monday: SAP’s warning, and IPO updates for both Airbnb and Databricks

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast where we unpack the numbers behind the headlines.

This is Equity Monday, our weekly kickoff that tracks the latest big news, chats about the coming week, digs into some recent funding rounds and mulls over a larger theme or narrative from the private markets. You can follow the show on Twitter here and myself here — and don’t forget to check out last Friday’s episode that includes some high-quality Quibi jokes, if I recall correctly.

This was a busy morning, with lots to talk about it. Here’s what we got into:

Shoutout Lewis Hamilton and that G2 series. Ok, chat Thursday!

Equity drops every Monday at 7:00 a.m. PT and Thursday afternoon as fast as we can get it out, so subscribe to us on Apple PodcastsOvercastSpotify and all the casts.

Startups – TechCrunch

How much to ask for in equity?

I’m probably about to join a four old health/insurance startup with about four years in the building that has just started getting major clients and rapidly growing.

I would be joining as the lead product designer in a sixteen person startup that is fully remote and managing the entire design workflow. (I have a product design intern helping me)

It was a pretty bullshit long and intense interview process for leaving my cushy enterprise job but I wanted to make the move to broaden my horizons and grow. I last spoke with the lead developer who basically was the same as me in regards to startups (ambivalent and kind of skeptical) but he said he was convinced of the product only after a year of freelancing remote to it and moved in-perdon with his family in the middle of the pandemic to focus full-time on it.

I believe the startup is max three years from a buy-out by a bigger insurance or health company. How much equity should I be asking for? On Angelist it says salary for my role is 90k-125k and 0.1-0.25% equity. Realistically, I’m expecting a lower offer. Should I ask for equity straight up, MUA’s? Etc. I just want to cover my bases for what I foresee to be the long-haul until aquisition.

Thanks!

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Solve the ‘dead equity’ problem with a longer founder vesting schedule – TechCrunch – Best gaming pro

Solve the ‘dead equity’ problem with a longer founder vesting schedule – TechCrunch  Best gaming pro
“nigeria startups when:7d” – Google News

Equity Shot: The DoJ, Google, and the suit could mean for startups

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast where we unpack the numbers behind the headlines.

It’s a big day in tech because the US Federal Government is going after Google on anti-competitive grounds. Sure, the timing appears crassly political and the case is not picking up huge plaudits thus far for its air-tightness, but that doesn’t mean we can ignore it.

So Danny and I got on the horn to chat it up for about 10 minutes to fill you in. For reference, you can read the full filing here, in case you want to get your nails in. It’s not a complicated read. Get in there.

As a pair we dug into what stood out from the suit, what we think about the historical context, and also noodled at the end about what the whole situation could mean for startups; it’s not all good news, but adding lots of competitive space to the market would be a net-good for upstart tech companies in the long-run.

And consumers. Competition is good.

You can read TechCrunch’s early coverage of the suit here, and our look at the market’s reaction here. Let’s go!

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Startups – TechCrunch

Should I ask for equity and if yes, how much?

I have an interview coming up for a company for an intermediate level position. It seems like there are only around 15 employees so far and they're advertising for 3 more.

I can't see any information about funding on their angel .co page (only that they were founded in 2019) so it isn't clear whether they have received funding, if they're in the process or if it is being built with no external investors.

The job description says no equity & 30-35k for the position I'm applying for. The two other roles (more senior positions) are being offered a salary and .5% – 1.5% equity.

My question is: if it turns out that I'm a good fit, should I ask for equity and how do I/what questions should I ask to determine how much?

note: I'm new to this sub. If I haven't put the correct flair, please let me know

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Startups – Rapid Growth and Innovation is in Our Very Nature!

Equity grant for second sales rep?

Our company is 30 people, pre series A and we are about to bring on our second sales rep who will help build out some processes as well as close deals. Is a .1% equity reasonable or is that too little? Haven't navigated the waters on this too much and would like some input from others!

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The need for true equity in equity compensation

I began my career at Oracle in the mid-1980s and have since been around the proverbial block, particularly in Silicon Valley working for and with companies ranging from the Fortune 50 to global consulting companies to leading a number of startups, including the SaaS company I presently lead. Throughout my career, I’ve carved out a niche not only working with technology companies, but focused on designing and implementing global compensation programs.

In short, if there’s two things I know like the back of my hand, it’s tech and how people are paid.

The compensation evolution I’ve witnessed over these past 35+ years has been dramatic. Among other things, there has been a fundamentally seismic shift in how women are perceived and paid, principally for the better. Some of it, in truth, has been window dressing. It’s good PR to say you’re a company with a strong culture focused on diversity, as it helps attract top talent. But the rubber meets the road once hires get past the recruiter. When companies don’t do what they say, we see mass exoduses and even lawsuits, as has recently been the case at Pinterest and Carta.

So with the likes of Intel, Salesforce and Apple publicly committed to gender pay equity, there’s nothing left to see here, right? Actually, we’re not even close. Yes, the glass ceiling is cracking. But significant, largely unaddressed gaps remain relative to the broader scope of long-tail compensation for women, especially at startups, where essential measures of economic reward such as stock options in companies are often not even part of the conversation around pay parity.

As a baseline, while progress is evident, gender pay is an unfinished product to say the least. Recently the U.S. Bureau of Labor Statistics found white women earn 83.3% as much as their white male counterparts, while African-American women earn 93.7% compared to men of their same race. Asian women made 77.1% and Hispanic women earned 85.1% as much respectively.

According to Payscale, the ratio of the median earnings of women to men has decreased by just $ 0.07 since 2015, and in 2020, women make $ 0.81 for every dollar a man makes. Long term, in calculating presumptive raises given over a 40-year career, women could lose as much as $ 900,000 over the duration of a career.

But that’s just the tip of the iceberg. Even if we solely left the gender pay gap to just a cash salary disparity, there is something further to see here. However, to quote a famous pitchman, “But wait, there’s more!” And the more — at least in my mind — is far more troubling.

As innovative startups from Silicon Valley to New York’s Silicon Alley and beyond continue to reshape the business landscape, guess how most of them are able to lure bright, entrepreneurial minds? It’s certainly not salary, as when a company has nothing beyond a great idea and maybe a lead to a VC on Sand Hill Road, there’s no fat paycheck or benefits package to offer. Instead, they dangle the proverbial carrot of stock/equity compensation.

“Look, we know you can get $ 180,000 a year from Apple but we’ll give you $ 48,000 a year plus 1,000 shares presently valuated at $ 62 per share. Our board — which is packed with studs from the Bay Area — is expecting that to soar within two years! Wait ‘til we go public!”

This is the pitch, at least if you’re a promising male. But women, historically, have tended to get left out of this lucrative reward package for varying reasons.

How has this happened? Beyond just a furtherance of business culture, while there have been legislative steps taken to address inequities in public company compensation and stock dispersal, there are no regulations as to how private companies distribute or manage the appreciation of stock. And, as we all know, the appreciation can be potentially massive.

It makes sense. Many companies and even naïve job-seekers consider equity as the “third pillar” of compensation beyond titles/compensation (which come hand-in-hand) and benefits. Shares of startups are just not top-of-mind — often ignored or misunderstood — by many who look at gender pay inequities, although that could not be more misguided.

A recent study published in the “Journal of Applied Psychology” found a gender gap for equity-based awards ranging from 15%-30% — even beyond accounting for typical reasons women historically earn less than men, including differences in occupation and length of service at a company. Keep in mind many of these companies will go on to massive valuations, and for some, lucrative IPOs or acquisitions.

It’s a problem I recognized long ago, and it is largely why I agreed to lead our Bay Area startup on behalf of our New York-based parent company AST. I found a commitment to a genuinely equitable culture instilled by a shared moral compass, a belief that companies who care about gender equity perform better and provide better returns, and a conviction that diversity brings unique perspectives, drives talent retention, builds a stronger culture and aids client satisfaction.

In speaking with industry colleagues, I know it’s something CEOs, both men and women, are dedicated to addressing. I believe creating a broader picture of compensation is essential for startups, global conglomerates and every company in between. If you are in a position of leadership and recognize this is a challenge in need of addressing at your company, here are some steps I recommend you implement:

  1. Look at the data: Do the analysis. See if this is truly an issue at your company, and if it is, commit to creating a level playing field. There are plenty of experienced consultants who can help you work through remediation strategies.
  2. Remove subjectivity: Hire an independent arbiter to analyze your data, as it removes the politics and emotion, as well as bias from the work product.
  3. Create compensation bands: Much like the government’s GS system, create a salary grade system that contains bands of compensation for specific roles. Prior to hiring a person, decide which band the job responsibilities should be assigned.
  4. Empower a champion: Identify and empower an internal champion to truly own parity — someone whose performance is judged based upon creating equity company-wide. Instead of assigning it to your human resources chief, create a chief diversity officer role to own it. After all, this is bigger than just pay or medical benefits. This is the culture and thus foundation of your company.
  5. Get your board on board: Educate your board as to why this matters. If your board doesn’t value this, it ultimately won’t matter. Companies have audit committee chairs or nominations chairs. Identify a “culture chair.”

One of the first reports we created is a Pay Comparison Report so there are tools anyone in management can easily use to review stock grants made to all employees and ensure equity between people of different ethnicities or gender. It’s not that hard if you care to look.

When I was graduating from college and Ronald Reagan was in office, we were talking about the potential for women to break the glass ceiling. Now, many years later, somehow we’ve managed to develop lights you can turn on and off by clapping and most of us are walking around with the power of a supercomputer in our hands. Is it really asking too much that we require gender pay equity, including all three compensation pillars (cash, benefits and stock), to be a priority?

 

Startups – TechCrunch