Should I use a SAFE note template I found?

Hi *****! My name is Dolan, and I’d be happy to help with this. I carefully review each question and provide responses based on my years of hands-on experience as a lawyer.

SAFE notes are great tools for early-stage financing, but using a generic template without customization can pose risks. It depends on the template, your specific deal terms, and whether it matches your situation.

Can you tell me a bit more about the template and the terms you’re working with?

Ah, the Y Combinator SAFE template! That’s a solid starting point. YC designed it to be simple and investor-friendly, which is why it’s widely used. That said, even a standard template might need adjustments depending on your specific situation.

Are you raising funds as a startup founder, or are you investing as part of someone else’s SAFE offering?

Got it. In that case, using the YC SAFE template is a practical choice, but you’ll need to tailor it to fit your raise. Can you share details like:
1. The valuation cap?
2. The discount rate, if any?
3. Whether you’re using a post-money or pre-money SAFE?
These terms will impact your company’s future equity structure.

That sounds like a reasonable structure. Post-money SAFEs are great for founders because they provide clarity on ownership after the financing round. Here’s what you’ll want to double-check in the template:
1. Valuation Cap and Discount: Ensure they’re clearly stated in the SAFE.
2. Conversion Triggers: Confirm the conditions that convert the SAFE into equity.
3. Investor Rights: Some SAFEs include optional pro rata rights for investors to participate in future rounds.
Have you started filling out the template yet, or are you still reviewing it?

Pro rata rights let investors maintain their ownership percentage in your company by investing additional funds in future rounds. For example, if an investor holds 5% after their SAFE converts, pro rata rights allow them to invest more in subsequent rounds to stay at 5%. Including this can make your SAFE more attractive to investors, but it’s not mandatory. Do you think your investors will want that option?

If you anticipate future rounds and want to build trust with investors, including pro rata rights can be a good move. Just make sure the language limits this right to a fair percentage and timeframe. You don’t want to overcommit or complicate future raises. Do you need help drafting that section?

Here’s an example clause:
“The investor shall have the right, but not the obligation, to purchase additional shares in future financing rounds in an amount sufficient to maintain their ownership percentage, subject to the terms of such financing.”
This keeps it straightforward while giving investors peace of mind. Does that cover what you’re looking for?

Another key item is whether your SAFE includes a most-favored nation (MFN) clause. This clause ensures that if you issue SAFEs with better terms later, early investors can adopt those terms. Including an MFN clause can reassure early investors but might limit your flexibility in future raises. Is that in your template?

If your raise involves only a few trusted investors, skipping the MFN clause could simplify things. But if you’re opening the round to many participants or anticipate offering better terms later, including an MFN clause might save you from renegotiations. It’s a trade-off between investor confidence and flexibility. How many investors are you bringing into this round?

In that case, you could skip the MFN clause and explain your reasoning to the investors. It’s easier to manage expectations with a small group you trust. One final tip: double-check the dissolution terms. If the company doesn’t raise a priced round or has to wind down, the SAFE should specify how remaining assets are distributed. Does the template address that?

That’s standard and ensures investors recover something before founders or employees if the company dissolves. Make sure there’s also clarity on:
1. Whether SAFE holders rank equally with other debt holders.
2. How pro rata rights or other clauses might impact distributions.
If those sections seem unclear, I can help refine them.

You’re welcome! SAFEs are a great tool, and it sounds like you’re structuring this raise thoughtfully. If you’re happy with the advice I provided, I’d really appreciate a review! It helps others know they can rely on me for clear, practical guidance.

Thank you so much! Best of luck with your raise—let me know if you have more questions down the line. Have a great day!