The "SAFE Agreement"
Simple Agreement for Future Equity
Top 3 Things Startups Need to Know About SAFE Notes?
What is a SAFE Note?
This is not your typical safe where you've got a vault and you lock money, you put it in there necessarily. Although I can draw an analogy to that in a little bit.
A SAFE, the acronym stands for a Simply Agreement for Future Equity. A SAFE is an agreement that grants the holder the right to equity at a potential future financing when the startup sells preferred stock.
Let's break that down.
It's an agreement. Whether its a convertible note or equity round, a SAFE provides a startup the option or the opportunity to not necessarily have to put a strict valuation on that particular round. Gives them a little more flexibility.
What are some positives about a SAFE note?
Another positive to the SAFE round is the fact that if you're raising money as a startup one of the biggest challenges is bringing together all the different interested investors and have them sign a document, where they might want to negotiate different terms. That just makes it incredibly prohibitive or creates an obstacle for the startups to focus on the products. A SAFE note looks out for the founder, which we very much appreciate. In terms of the documentation, instead of having to pay a lot of extra attorneys fees, which you may not have as a startup, this makes it all simple. It's very pro-founder friendly and I think that's why this came out of Y-Combinator where you've got so many awesome startups out of their incubator. That's the definition. It's an agreement that grants the holder the right to equity at a potential future financing when the startup sells preferred stock.
Now here's in practice. This is from Y-Combinator. Unlike a convertible note, a SAFE is not a debt instrument. Debt instruments have maturity dates, they're subject to regulation, there's threat of insolvency, et cetera. This is not a loan. This is not a loan with interest or a note rather with interest, okay. That's typically what a convertible note is. We have tons more inside access on both of these at our course website AngelKings.com/course. This is not a note or a debt offering, okay? That's important to know.
A SAFE note is an agreement that grants the holder the right to equity at a potential future financing when the startup sells preferred stock.
The second thing is, because the money is invested in a startup via SAFE which is not a loan, it will not accrue interest. First up, I want to make a distinction here. If you are investing in venture capital, you should not be investing for the purpose of getting a dividend. If you are, you're investing in the wrong thing. The purpose of startup investing is high risk-high reward. There are some astronomical returns that we've seen at Angle Kings. Sure you can invest in the public market in dividend paying stocks, in LPs that pay five to ten percent. Great companies like Blackstone, KKR, that pay big, private equity firms, but if you're in the private market, which is what we're investing in, you know we're not looking for a high dividend percent.
Number three, this is as flexible, one document security without numerous terms and I mentioned this early in the definition, but it saves so much money. You know. If you have a couple hundred thousand dollars and your runway's small, and you're out there spending more time working with attorneys and drafting documents as opposed to getting customers and clients, you'll lose out. There's an inherent opportunity cost that you might suffer from. We like that about a SAFE documents as well.
A SAFE note is a flexible, one document security without numerous terms and saves startups so much money.
Fourth thing, a SAFE still allows for what's called high resolution fundraising. That means startups can close with investors as soon as both parties are ready. If you have ten investors in either Seed or Series A Rounds, you don't always see the same investors in each round. If you have ten investors and one is in California, one is in Japan, one is in China, whatever. Different time zones, maybe they're in east coast, west coast - just coordinating time alone is difficult. Imagine if you throw in evaluations that the investors are trying to do and the preferred stock terms; all the coordination based on time zones alone becomes a nightmare. That's why we like the SAFE document. It makes the entire process as least hassle-free as possible.
Here's the point. SAFE note is excellent for startups. It's not necessarily good though for individual inexperienced investors who want greater involvement. Meaning, if you're a micro-manager and you need to have everything managed and every little document detail, then the SAFE isn't for you, so know that. But overall, it's a great document. If you want to learn more we'd love to help investors. We love helping startups at Angel Kings. Make sure to get in contact with us or sign up for our course.