10. Simple Agreement for Equity (SAFE)
Section outline
-
This section looks at a financing instrument that has become increasingly popular for seed financing: The Simple Agreement for Equity, or SAFE. The logic of a SAFE is indeed very simple: Instead of negotiating all the deal terms today, the company and the investor agree that the investor will receive company stock at a later date, in connection with a priced liquidity event such as the issuance of Preferred Stock or the liquidation of the company.
In this section we discuss the key terms of a SAFE, namely the Valuation Cap and the Discount Rate and we provide various examples for how a SAFE works in different scenarios. We conclude with a discussion of the advantages and the disadvantages of this innovative security.