The Newest Player in Early Stage Financing Rounds: the SAFE

Companies looking to raise early stage funds should seriously consider the Simple Agreement for Future Equity, or SAFE. First announced by Y Combinator in late 2013, the SAFE is a simpler, faster tool for raising money than the convertible note structure which has been predominant in early round financing since 2010.  Investors can fund through a SAFE, and in most cases there is no further action required until the SAFE automatically converts into true equity at the time the company closes its first round of equity financing. Crucially, the company can avoid setting a valuation when the SAFE investment is made (like with convertible debt).  Typically, the company and its investors will only need to negotiate an appropriate valuation cap before closing a SAFE investment.  Unlike convertible note financings, which require negotiation of interest rates and maturity dates (and potentially re-negotiations if the debt remains outstanding at the maturity date), and which often require the company to issue warrants and/or encumber its assets with a security interest, a SAFE should require less negotiation with investors. SAFE financings are done through a single agreement.  They can be negotiated as larger multi-investor rounds, or as one-off agreements.

Given that the initial wave of SAFEs were closed in 2014, primarily on the West Coast, there has been some natural reluctance by investors to adopt this approach over the more established convertible debt financing or even a pre-seed/seed equity round. Companies can seek to entice any such cautious investors through conversion discounts (like with convertible debt), MFN clauses or other protections. As a general rule, SAFEs are adaptable instruments that can be customized to fit the company and its investors.  In a similar vein, although SAFEs were designed primarily for Delaware corporations, an LLC or other entity (whether or not formed Delaware) can raise money through a SAFE.