Safe is a Simple Agreement for Future Equity. YC partner Corlynn Levy created it as an alternative to convertible notes in December of 2013. Convertible notes have disadvantages. There are legal regulations for debt which include requiring a return, interest rates cannot be to far from market, and conversion can be complicated.
The advantage of raising capital via convertible notes is that it is quicker. Bit there are also other advantages as well which include:
1. The valuation discussion is postponed to a later date: Typical seed stage startups do not have the established metrics to base a valuation on. Startups will use the proceeds from the convertible note to get the product into the market and establish unit economics the best they can so that when a VC goes to invest they have something to base a valuation on for a priced round. The note will convert into the equity round at some discount ans the early investor will be rewarded for the risk.
2. Reduced legal fees: When closing a priced round it can be challenging to agA convertible note is an accepted standard and relatively easy to get agreement on. With convertible notes the contract is usually just between the start-up and the investors: there is no notary involved and documentation is much simpler, so everything is much quicker and cheaper. Convertibles are known to be agreed and closed within a short time frame.
How does a SAFE differ from convertible debt?
1. Unlike a convertible note, a safe is not a debt instrument. Debt instruments have maturity dates, are typically subject to certain regulations, create the threat of insolvency, and can include security interests and sometimes subordination agreements, all of which can have unintended negative consequences for startups.
2. Because the money invested in a startup via a safe is not a loan, it will not accrue interest. This is particularly beneficial for startups, but also better embodies the intention of investors, who never meant to be lenders in the first place.
3. It is a flexible one-document security without numerous terms to negotiate. A safe should save startups and investors money in legal fees and reduce the time spent negotiating the terms of the investment. Startups and investors will usually only have to negotiate one item: the valuation cap. Because a safe has no expiration or maturity date, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like.
4. A safe still allows for high resolution fundraising. Startups can close with investors as soon as both parties are ready, instead of trying to coordinate a single close with all investors simultaneously.
Similar to a safe is a kiss which we talked about here.
Have you used a safe before? Did you like your experience with them?