Distribution of dividends: Because of a loophole, dividends do not have to be paid to SAFE note holders the way they are paid to common shareholders. However, since the real purpose of a SAFE note is not to be repaid but to gain equity, investors may be comfortable with this arrangement.

What happens if a SAFE never converts?

If the company never decides to raise again, the SAFE will continue in perpetuity without ever converting. Like most convertible equity notes, SAFEs grant investors the right to receive a certain number of shares in a future priced funding round. Another liability for investors is that repayment is not required.

Are SAFEs pre or post-money?

The valuation cap in the new SAFE is post-money (as opposed to pre-money). But if an investor and company agree on a post-money valuation, then an investor’s resulting ownership is a function of their investment and the post-money valuation irrespective of the round size. SAFEs have just become the latter.

Are SAFEs considered debt or equity?

SAFEs are neither equity nor debt – they represent a contractual right to future equity, in exchange for which the holder of the SAFE contributes capital to the company.

How does a SAFE note convert?

A discount rate in a SAFE Note entitles the investor to purchase shares at a discounted price. Without a valuation cap or a discount price, the SAFE Note simply converts into equity at the price of the issuing company’s subsequent round.

Can you sell a SAFE note?

Risk note: Startup investing is risky, so there’s no guarantee of a return on this kind of investment. Can I sell my SAFE? In general, you can only sell a SAFE after one year from purchase date and only if you find a buyer, which might not be easy to do.

What happens when SAFE converts?

In exchange, the investor receives a right to convert that amount into shares when certain pre-agreed trigger events occur. However, it will commonly include a discount to the market value of a share when the SAFE converts. This allows the investor to receive shares at a lower price than what they are worth.

Are SAFEs bad for investors?

SAFEs do not represent a current equity stake in the company in which you are investing. Instead, the terms of the SAFE have to be met in order for you to receive your equity stake. SAFEs may only convert to equity if certain triggering events occur.

How does a pre-Money SAFE convert?

The pre-money SAFE includes a built-in pro rata right but it often confused investors and companies alike as it granted a right to purchase shares in the financing round after the round in which the SAFE converted (e.g., if the SAFE converted in the Series A round, the pro rata rights kicked in at the next financing …

What is a SAFE for fundraising?

What is a SAFE? SAFE stands for Simple Agreement for Future Equity. It’s a convertible instrument, which is a type of investment that converts into equity at a specified time. With SAFEs, that “specified time” is typically your company’s next priced round.

What are safe notes and what do they do?

SAFE (simple agreement for future equity) notes are a simpler alternative to convertible notes. They were created in 2013 by Y Combinator, a Silicon Valley accelerator, and allow startups to structure seed investments without interest rates or maturity dates.

Is there a limit to how much you can sell a safe note?

Capped SAFE Notes Make the first convertible or SAFE note have a low cap on the amount sold, such as $1 million or $2 million — something reasonable. Don’t do many rounds of notes with many different limits on them. That is too risky.

When do you use a post money safe?

While safes are being used for these seed rounds, these rounds are really better considered as wholly separate financings, rather than “bridges” into later priced rounds. In 2018 we released the “post-money” safe.

Can you raise money with uncapped safe notes?

It is debatable whether anyone actually raises money with uncapped safes. Founders tend to use SAFE notes with caps. Note that five hundred startups have applied to raise funds on SeedInvest but have had to turn down deals with uncapped SAFE notes.