At the end of 2013, Y Combinator published the Simple Agreement for Future Equity (“SAFE”) investment instrument as an alternative to convertible debt.  This investment vehicle is now known in the U.S. and Canada because of its simplicity and low transaction costs. However, as use is increasingly frequent, concerns have arisen about its potential impact on entrepreneurs, particularly where several SAFE investment cycles take place prior to a private equity cycle and potential risks to un accredited crowdfunding investors who could invest in the SAFes of companies that realistically, never receive venture capital financing and therefore never convert to equity.  A SAFE is akin to a convertible loan, both of which have given the investor the right to obtain shares at a preferential price in the future. However, the two instruments are fundamentally different, because the convertible bond is a debt, but not a SAFE. When deciding to create a convertible bond or SAFE, you must consider the following differences: Equity financing is defined in the SAFE as “bona fide transaction or series of transactions with the main purpose of raising capital,” whereby the entity issues and sells preferred shares for a fixed pre-financing valuation. Unlike a convertible bond, there is no threshold or minimum amount for equity financing. 1) the preferred share price to offer for equity financing; 2) the preferred share price that must be offered with a discount for equity financing; 3. the price per share determined by a pre-negotiated valuation ceiling (see below); or four. Option 2 or Option 3 below. Some issuers offer a new type of security as part of some crowdfunding offers they have called safe.
The acronym means Simple Agreement for Future Equity. These securities are risky and very different from traditional common shares. As the Securities and Exchange Commission (SEC) states in a new investor newsletter, despite its name, a SAFE offer cannot be “simple” or “safe.” Under a Simple Agreement for Future Equity (SAFE), the investment is converted into equity when there is a “equity financing,” a “liquidity event” or “a dissolution event.” (a) When the company obtains “equity financing,” the investor receives preferred shares with the same rights and preferences as the preferred shares that the company must issue for equity financing (in this case, the processing price is the “safe price.” See below); Y Combinator, a well-known technology accelerator, created the SAFE rating in 2013 (simple agreement on future capital) and uses it to finance most start-ups participating in three-month development meetings. Since 2005, Y Combinator has funded more than 1,000 startups, including Dropbox, Reddit, WePay, Airbnb and Instacart. The valuation cap is a pre-negotiated amount that is used to “capen” the conversion price.