In most cases, SAFEs don't supply investors with dividends. As a result, investors sometimes end up making less over time.Ī lot of companies provide dividends, either in the form of payments or additional shares, to investors when the company performs well. SAFE notes aren't a loan, meaning investors don't receive any sort of interest or payments. SAFE notes offer a number of benefits, but they do come with their fair share of challenges, such as that they:īecause a SAFE note's outcome depends on how the company progresses, investors don't have a guarantee that it will ever convert into equity.Ĭonvertible notes provide investors with continual interest payments. Investors could end up with benefits that are actually better when compared to their original investment. Since SAFE notes are converted into preferred stock, often at a discounted price, investors have a lot of incentive for using them.
Without repayment obligations and maturity dates looming over your head, you end up having a lot more freedom and flexibility as a company owner. In fact, the only things that really need to be negotiated are the discount rate and the valuation cap. Since SAFEs are so simple, there are fewer terms to negotiate, making everything that needs to be discussed clear and concise. SAFE notes are included in a company's capitalization table, eliminating the need for any complicated tax consequences. This is largely due to the fact that there aren't any end dates or interest payments to worry about, unlike with a convertible note.Īnd investors by including key agreements for potential future occurrences, such as:Įarly exits by investors and company owners One of the primary benefits of SAFE notes is that they are typically less than five pages long and are simple enough for anyone to understand. There are several benefits of using SAFEs, including that they: When issuing a SAFE note, you can choose from four different scenarios: *By purchasing a template, you acknowledge that you have read and understood Pro-rata, or participation rights, allow investors to invest extra funds so that they can keep their percentage of ownership during future equity financing. If the first SAFE holder finds the second SAFE's terms to be more favorable, they can ask for the same terms. In cases where there are multiple SAFEs, this term requires that the company notify the first SAFE about it, including the terms for the subsequent note. Valuation caps are a term in SAFE notes that establish the highest price, or cap, that can be used when setting the conversion price.
This means that the investor will be able to purchase shares at a discount on the future financing.įor example, if the company offered SAFE note holders a 20% discount and achieves a valuation of $10 million, with shares available to new investors at $10, the SAFE investors will be able to buy their shares at $8, thus receiving a 20% discount.Īnother way for the investor to get a better price per share than future investors is through a valuation cap. SAFEs sometimes apply discounts, usually between 10% and 30%, on future converted equity. SAFE notes contain a few primary terms that alter how they eventually convert to company shares, and they are: You can then calculate the company's new price per share with this information.Īfter you know the price per share, you can convert the SAFE note into the applicable number of shares in the company and distribute them to the SAFE investor. Once progress has been made, you find another investor, giving your company what is known as post-money valuation. The company uses the original investment to build the business. Here's a look at the basic steps that take place when utilizing a SAFE note for your startup:Īn investor provides seed money in exchange for promised future equity. SAFE notes work by allowing you to postpone your company's valuation until a later date. When a company is first starting out, there is typically very little data, making it difficult to assign the company any value. Helpful tools for startups trying to grow or scale their business. Though convertible notes are a bit more complex, both SAFE and convertible notes are: Because of this, convertible notes usually have a maturity rate and an interest rate. SAFE notes are a type of convertible security, while convertible notes are a form of debt that can convert into equity once certain milestones are met. Essentially, a SAFE note acts as a legally binding promise to allow an investor to purchase a specified number of shares for an agreed-upon price at some point in the future. SAFE (or simple agreement for future equity) notes are documents that startups often use to help raise seed capital.
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