First developed by Y Combinator in 2013, a Simple Agreement for Future Equity, or SAFE, grants an investor the right to acquire equity in a company at a future date IF that company successfully closes on a future round of equity financing with professional investors (i.e. venture capitalists, private equity firms, and other accredited investor funds). The key takeaway is IF. As such, you should only invest under a SAFE structure if you believe, through thorough due diligence, the issuing company will raise equity financing in the future. Historically, SAFEs have been used by Silicon Valley startups raising money from accredited angel investors. It’s often difficult to value startups in their early stages, and so SAFEs allow startups to delay that valuation until a future date when a company has a deeper track record and greater network of resources to leverage in that regard. SAFEs are also cheaper and simpler contracts than priced equity rounds, which enables startups to streamline early-stage “equity-like” financing rounds and better position their companies for future raises by avoiding visually crowded capital stacks (REMEMBER – SAFE holders don’t initially hold any true equity in a company, and so are not listed out on the capital stack until converted upon a future equity raise). However, SAFEs are not “safe” or guaranteed to provide any sort of return to investors. With SAFEs, you’re betting on a company’s ability to execute, grow, and attract private investment down the road. Without those factors, a SAFE doesn’t provide any benefit to investors, and your initial contribution is just that, a contribution. If all goes well, the number of shares a SAFE holder receives is determined at the next priced equity financing, when professional investors (i.e. venture capitalists, private equity firms, etc.) set the price for preferred stock. Then, based on the calculated valuation cap and any applicable discount rate, a SAFE position will convert into equity shares within the associated company, often at a lower price than the professional investors involved in the triggering raise, because SAFE holders were involved earlier on. With SAFEs, the most important metric is a company’s valuation cap, which sets the maximum price for a stock. Typically, the lower the price, the more shares you’ll receive. For example, if you invest in a startup with a valuation cap of $8 million, and they later close on another equity round priced at a $20 million pre-money valuation, the amount of stock you’ll receive will be priced off the lower $8 million benchmark. Conversely, if the next investors value the company at $4 million, that will be your price instead (perhaps further discounted by any applicable discount rates). Different from convertible notes, SAFEs are not loans, and thus, do not (i) accrue interest, (ii) have a maturity date, or (iii) have a legal obligation to be paid back. This structure lends itself to be a more streamlined path to finance a startup and avoids much of any need to amend terms in the future if the Series A financing takes longer than expected to come to fruition. Furthermore, SAFEs typically align better with the intention of most early-stage equity investors who never intended to be lenders, as convertible notes are rarely paid back in cash despite being a debt instrument. Conversely, convertible notes allow for a moderate return on investment during the holding period, and there is a set conversion date of the principal investment into equity in the future. Each security is different and best suited for certain business types, growth plans, and so forth, as well as certain investor appetites for risk and return. Startups and early-stage companies exploring SAFEs as a financing structure for their Regulation Crowdfunding raise should consider a few more points before moving forward:

• Repurchase Rights - A “crowded” capital stack continues to be a concern with Regulation Crowdfunding, as venture capitalists typically steer clear of messy tables that could be problematic in executing a follow-on financing in a timely manner. To mitigate some of that concern, companies can set certain repurchase provisions to buy back SAFE positions to clean up their capital stacks before approaching professional investor networks for follow-on investment. Buy backs rights are typically reserved for minority positions (those positions typically below $10,000 in value), and are repurchased prior to a conversion at the greater of the purchase amount or the Fair Market Value, as determined by an appraiser of the company’s choosing.
• Amendment Rights - Since a SAFE is not set by certain terms such as a maturity date or interest rate as is a convertible note, the need for common amendments is minimal. That said, never say never. A complex issue with a follow-on financing could arise down the road that may require an amendment to a SAFE, and thus hundreds of signatures from your crowdfunding investor base. To streamline this administrative nightmare, companies can set certain amendment provisions that designate a lead investor to act on behalf of all other SAFE holders for that particular round. That said, a lead investor cannot change the valuation cap on their own.
• Power of Attorney - Again, “crowded” capital stacks are an ongoing concern for crowdfunded companies. Another tactic to mitigate this concern is for companies to set certain power of attorney provisions that would appoint voting and execution rights to the companies Chief Executive Officer for all minority shareholders following conversion of the associated SAFE. While this doesn’t mitigate potential issues pre-Series A, assigning minority shareholder rights to the CEO will streamline all future rounds from there on out.