SAFE: an instrument for early-stage fundraising

A new tool in corporate financing is called a Simple Agreement for Future Equity, or a “SAFE.” A SAFE is an agreement between an investor and a company wherein the investor will receive equity in the company in the future, if a certain specified event occurs. The U.S. Securities and Exchange Commission (SEC) issued an investor bulletin discussing the use of SAFEs in crowdfunding offerings and noted that, despite their name, they may not be “simple or safe” for either party. SAFEs are not considered debt instruments or common stock and do not provide the investor with a current equity stake in the company.

SAFEs can be useful to companies, especially startups, because the agreements are relatively simple, which can provide a company with flexibility. Additionally, within the SAFE, there is not a current need for the investor and the company to agree on a current valuation or share price because it will be fixed at a later date.  SAFEs also traditionally do not accrue interest or have a maturity date, unlike the more customary convertible notes.

From an investor standpoint, the SEC notes that, “SAFEs were developed in Silicon Valley as a way for venture capital investors to quickly invest in a hot startup without burdening the startup with the more labored negotiations an equity offering may entail.” SAFEs are attractive to investors because when SAFEs do convert, the investor could potentially be entitled to increased benefits in proportion to the original investment, such as preferred stock, depending on the terms of the SAFE.

The most important concept for an investor and a company to consider when deciding if a SAFE will be the right investment tool is determining the triggering event. Not all SAFEs are triggered by the same event and it can vary from company to company. Some examples of triggering events are a merger or acquisition by another company, an initial public offering of securities, or additional rounds of equity financing. Although there is an identified trigger within the SAFE, there are certain scenarios where the trigger is never activated and the SAFE is never converted, thus leaving an investor with nothing. SAFEs can also cause issues from a company standpoint because it can lead to many smaller investors potentially having voting rights and control of the company down the road, leading to deadlocks with the potential for forced dissolution.

Both the company and the investor should ensure that the terms of the SAFE have been thoroughly reviewed, as they can cause challenges for both sides in the future.

If you are an investor or an owner of a startup needing a cash infusion, contact a Chuhak & Tecson Corporate Transactions & Business Law attorney to ensure the SAFE agreement includes your best interests.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Corinne J. Pforr, Associate