SAFEs for Startup Financing: Benefits, Risks, Processes, and Avoiding Pitfalls

Description

A SAFE is a contractual agreement between a startup and its investors. In exchange for the investor's investment, the SAFE provides the investor with the right to equity in the startup when the company raises a future round of funding, typically a preferred stock financing round. The SAFE sets out conditions and parameters for when and how the capital will convert into equity. Unlike a convertible note, a SAFE does not accrue interest or have a maturity date. While the SAFE is not suitable for all financing situations, the terms are intended to be balanced by considering the interests of both the startup and investors.

Despite the simplification provided by SAFEs, over the past few years there has been an increase in additional terms creeping into the SAFE and being presented as part of the "standard" form--in many instances through a side letter. Some startups, desiring to move fast and accept what they believe to be industry-standard terms, do not realize that these additional terms sometimes give investors significant advantages or rights that the investor would not otherwise have with the standard SAFE form, which could impact a startup's ability to attract future capital from investors. Some examples of additional terms include board seats, pro rata rights, and information rights.

The pace of startup financings via SAFEs is expected to increase and evolve. Thus, it is important that both startups and investors understand how the SAFE actually works and the SAFE's impact on dilution. Much of the benefit that can be derived from using a SAFE can be quickly undone by either side's failure to understand or an attempt to get overly creative with additional terms.

Listen as our experienced panel discusses the good, the bad, and the ugly of SAFEs by providing the context ‎necessary to better understand its purpose and underlying terms.