A general misunderstanding is that SAFEs are standardized. Although YCombinator, the seed accelerator that created SAFEs, publishes standardized versions of the agreements on its site, these documents can and are modified by issuers. A lawyer is best placed to verify the SAFE in order to inform the investor of the effects of the specific document, such as: (1) the conditions of conversion, including the amount and conditions of conversion and the likelihood of such conversion; (2) the company`s buy-back rights and the company`s possible ability to prevent the conversion of the stake in exchange for the takeover of SAFE from the investor; (3) any rights of dissolution in the event of bankruptcy of the company before the conversion; and (4) the voting rights, if any, granted to the investor. Our first vault was a “pre-money” vault, because at the time of its launch, startups raised small amounts of money before launching a cheap funding round (typically a round of Serie A preferred shares). The safe was an easy and quick way to get the first money in the business, and the concept was that safe owners were just early investors in this future price cycle. But fundraising at the beginning developed in the years following the launch of the original vault, and now startups are raising much larger sums of money than the first round of “Seed” funding. While safes are used for these seed towers, these cycles are really better regarded as totally separate financing rather than “bridges” in subsequent price cycles. For a growing startup, the company is likely to raise more money. As a start-up investor, I`m not interested in just paying it back. The risk associated with a startup is high, so I hope that a high risk will be accompanied by a high upside potential. In this context, I would like my SAFE to be subsequently “converted” into equity. As soon as someone decides to invest in the company during a “price cycle”, my SAFE is converted into shares of the company. SAFE agreements are a relatively new type of investment created by Y Combinator in 2013.
These agreements are concluded between a company and an investor and create potential future equity in the company for the investor in exchange for immediate liquidity for the company. Safe converts into equity in a subsequent funding round, but only if a particular triggering event (described in the agreement) occurs. The exact conditions of a SAFE vary. However, the basic mechanism is that the investor provides specific financing to the company when it is signed. In return, the investor will subsequently receive shares of the company related to certain contractual liquidity events. The primary trigger is usually the sale of preferred shares by the company, typically as part of a future price increase cycle. Unlike a direct share purchase, shares are not valued at the time of signing the SAFE. Instead, investors and the company negotiate the mechanism by which future shares will be issued and postpone the actual valuation. These conditions typically include an entity valuation cap and/or a discount on the valuation of the shares at the time of the triggering event. In this way, the SAFE investor is insequential in the upward trend of the company between the date of signature of the SAFE (and the financing provided) and the trigger. To complicate matters a bit, a SAFE sometimes has a discount.
Since safe arrives later in front of each investor, the SAFE investor might want safe to be converted into equity with a discount on the subsequent funding cycle. Discounts are usually between 10 and 30%. To illustrate, I modeled what a 50% discount will look like. Instead of buying shares at 1.00 $US, the SAFE holder can buy shares at 0.50 $US. Here`s an example: as a startup, you undoubtedly go through agreements with other companies, suppliers, contractors, investors, and many more.