What is a SAFE for investment? (2024)

What is a SAFE for investment?

A simple agreement for future equity

(SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.

How does a safe agreement work?

When investors provide funding under a SAFE, they do so with the understanding that their cash infusion will convert into company shares during certain triggering events. Triggering events might be a future fundraising round, initial public offering (IPO), or liquidity event like the sale of the company.

What is an example of a SAFE note?

SAFE Note Example

For example, an investor purchases a SAFE note from your startup with a valuation cap of $10M. Your company's value is set at $20M at $10/share during the subsequent funding round. The SAFE note will convert based on the valuation cap of $10M.

Is a SAFE debt or equity?

No, a SAFE note is not a loan or debt, it is accounted for an equity on the balance sheet. Unlike convertible debt - or pretty much any debt, it does not have an interest rate nor does it have a maturity date.

What are the disadvantages of SAFE investments?

Like all early-stage investments, SAFEs can be especially risky because when you provide the funding, you don't end up owning anything. In the event of a liquidation or wind-down, you may get nothing if the SAFE hasn't already converted.

What are the benefits of a SAFE for investors?

Benefits for Investors

For investors, the primary attraction of a SAFE is the potential for high returns. If the startup succeeds, their equity could appreciate substantially. Since SAFEs are used primarily in early-stage startups, the initial investment is typically lower than in later funding rounds.

What is the discount rate for a SAFE investment?

The discount rate is another common negotiable feature of a SAFE. It gives investors a direct discount on the price per share the SAFE will ‎convert at relative to the price that the priced round investors will receive. The discount rate for a SAFE is generally between 75-90% (reflecting a 10-25% discount).

Should I invest in a SAFE note?

Startups may find SAFE notes appealing because, unlike convertible notes, they do not incur debt and therefore do not accumulate interest. It is important to note that SAFE notes do have some limitations that entrepreneurs should consider, as they can come at a high cost.

What are the disadvantages of safe notes?

Lack Of Interest Payments: Unlike debt instruments, SAFE notes don't typically offer interest payments, which could be a disadvantage for investors seeking immediate returns. Investor Risk: In the case of a successful startup, investors might end up with a smaller equity stake compared to a fixed valuation.

What are the risks of safe notes?

One of the most notorious dangers arises when founders raise two or more consecutive rounds of SAFE notes. The benefit of postponing the difficult valuation discussion at the early stage can become detrimental when the priced equity round inevitably comes (if they make it that far).

Is a SAFE taxable?

SAFEs are generally considered taxable at the time of the triggering event, when the SAFE converts into equity (i.e. stock in the company).

Is a SAFE note taxable?

Prepaid amounts under a forward contract usually do not alter its general tax treatment. In most settings, a SAFE holder does not recognize taxable income until the SAFE is converted to cash, equity or some other asset.

Can you do a SAFE for an LLC?

SAFEs – Yes, there are LLCs now doing SAFEs, although the SAFE instrument requires tweaking (like convertible notes) to make sense for an LLC. Even for C-Corps, we still see SAFEs being used only in a limited number of cases (again, because we serve companies outside of California, where SAFEs dominate).

What are 3 risky investments?

While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos) Mini-bonds (sometimes called high interest return bonds) Land banking.

Why cash is not a SAFE investment?

Cash does not earn any return in and of itself and so inflation can erode its buying power over time. Sitting in cash also presents an opportunity cost as it forgoes potentially better investments.

How do you know if an investment is SAFE?

What is the average return on a SAFE investment?

A good return on investment is generally considered to be about 7% per year, based on the average historic return of the S&P 500 index, and adjusting for inflation.

What is a SAFE way to start investing?

How does a SAFE convert to equity?

SAFEs only turn into equity shares at a conversion event, also called a trigger event. There are a few common conversion events: Conversion during financing: When your startup raises its next round of financing, SAFEs convert to equity.

What is the interest rate on a SAFE?

In addition to those benefits, SAFE notes have two major differences from convertible debt: No interest rate. Convertible debt typically has a small interest rate, maybe two to four percent.

What is the highest return on a SAFE investment?

Which investments give the highest returns? Stocks provide the highest average annual returns: 13.8%, on average, compared to 1.6% on bonds, 0.8% on gold, 8.8% on real estate and 0.38% on CDs, according to Fidelity.

Can a SAFE have an interest rate?

No Interest rate. This is the annual rate at which interest accrues on a loan, and accrued interest may need to be repaid, or add to the number of shares that the holder of an interest receives upon conversion. A SAFE has no accruing interest. No Maturity date.

Are SAFEs better than convertible notes?

Are SAFE notes safer than convertible notes? SAFE notes and convertible notes both carry risks and advantages. SAFE notes are simpler and do not have interest or maturity date, making them founder-friendly. Convertible notes offer more protection to investors, as they come with anti-dilution provisions.

What is the purpose of a SAFE note?

The SAFE note promises equity to an investor at a future date, allowing the issuer to postpone the valuation of a company to a date when they will be better able to value the company.

Who are the accredited investors in SAFE note?

Investors in a SAFE typically need to be "accredited investors" as defined by Regulation D. This includes individuals with a net worth of over $1 million (excluding the value of their primary residence) or annual income exceeding $200,000 in the last two years ($300,000 with a spouse).