SAFE
SAFE is an acronym for a simple agreement for future equity used in early-stage financing. A SAFE is a type of investment instrument. Y combinator, a seed fund, created a SAFE in the US over a decade ago and it, or variations of it, have grown in popularity here in Ireland.
What is a SAFE
A SAFE is an investment in a company for the right to get shares in the company in the future. The early nature of the investment usually gives the holder some preferential terms such as discounts. Usually a SAFE has limited parties: the investor and the company, which often means they can be completed quickly. The key features of a typical SAFE are set out below.
Triggering Events
The right to obtain equity is dependent on the occurrence of future triggering events. The triggering events are usually future investments that place a valuation on the company. SAFEs generally do not convert on an exit event (such as an asset sale, share sale or IPO), but in such scenarios, the holder of the SAFE gets a return as if the SAFE had converted.
Equity
At investment stage the SAFE does not place a valuation on the company. The investment essentially waits to crystallise at a later stage such as when a new round places a valuation (usually above a certain base valuation) on the company. At the point of this new qualifying investment, a SAFE will automatically convert. The conversion price of the SAFE is often the lesser of the round price less a discount or the price per share if the company was a certain value (a valuation cap). The discounts can vary in size but operate to give the holder of a SAFE a lower price per share than the round placing a valuation on the company. Simply put, if the SAFE converts on a new round it will take the round price less a discount; however if the price based on a valuation cap is better for the investor, the SAFE will convert at that price.
Ranking on a Liquidation
SAFEs often contain specific provisions around where they rank on a liquidation. They would be junior to debt but may contain alternative provisions around ranking with other instruments and share classes.
Non-repayable
SAFEs do not have a maturity date and are not loans. While the holder is entitled to a return on a sale or liquidation as outlined above, they are generally not otherwise repayable.
Warranties
Warranties would usually be included and given by the company. They are often very limited in scope such as the existence of the company and its capacity to contract.
Most Favoured Nation
Some SAFEs have a most favoured nation clause where if there is a future investment with preferential terms, the SAFE holder may look to get those rights for its investment. This could for instance be something like a lower valuation cap or a higher discount amongst other terms.
Side Letters
As the terms of a SAFE are often quite limited, there may be a side letter with additional or clarifying terms, such as additional warranties or undertakings from the founders of the company to the investor.
Pre-emption rights etc
While no shares are issued at the time a SAFE is entered into, the company should ensure that it will be in a position to issue shares in respect of the SAFE on the occurrence of the triggering event, and get any necessary waivers or consents up front.
SAFEs provide another avenue to invest. The above is a short overview of terms that would be typical for this type of investment but the parties may have specific criteria and negotiate a bespoke document.
For more information, please contact Gillian Hobbs or your usual Beauchamps contact.
