SAFE Agreement

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 2,665 reviews

Jump to Section

Need help with a SAFE Agreement?

Post Project Now

Post Your Project (It's Free)

Get Bids to Compare

 Hire Your Lawyer

Startups need to raise money, but it’s nearly impossible to attract new investors without discuss valuation and performance indicator data. While this may seem like a latent problem without a solution, the good news is that there’s an investment instrument, known as a SAFE agreement, that solves it. Startups don’t have to account for them as debt, either.

Find out everything you need to know about SAFE agreements through the article below.

What Is A SAFE Agreement?

SAFE agreements, also known as simple agreements for future equity and SAFE notes , are legal contracts that startups use to raise seed financing capital and similar to a warrant. They’re an alternative to convertible notes and KISS notes and were introduced by Y Combinator in 2013. The terms and conditions of SAFE agreements determine the relationship between the startup and investor regarding equity rights for triggering liquidity events.

Here’s an article that discusses SAFE agreements.

How Do SAFE Agreements Work?

It’s challenging to value a startup at the beginning of its inception. SAFE agreements solve this problem. They allow you to delay valuation until a future date while still having the opportunity to invest or raise capital.

Once the company grows, it will likely raise additional capital and subsequently increase in value. It’s this result that investors are trying to achieve. The SAFE agreement converts into company shares when new investors do priced rounds in the future.

Example of How Safe Agreements Work

Let’s say you invest $25,000 through a SAFE agreement. Since assigning a valuation to early stage companies is almost meaningless, the startup will leverage its SAFE agreement to find new investors to defer valuation to a future event. The investors are simply buying the right to equity in the future, when the startup has more traction and performance data that would allow an institutional investor to properly value the startup. At this point, your $25,000 would convert into equity relative to the valuation of the priced round. Early investors typically get a benefit from taking a risk, which includes discounts and valuation caps.

This article also discusses what you need to know about SAFE Agreements.

SAFE Agreement Templates

Purchase and download fillable PDF templates that match your SAFE Agreement needs.
Pre-Money SAFE Note
For pre-money valuation.
Post-Money SAFE Note
For post-money valuation.
*By purchasing a template, you acknowledge that you have read and understood ContractsCounsel's Terms of Use.

Important Terms in a SAFE Agreement

SAFE agreements are powerful investing tools. However, there are important terms in SAFE Agreements that you must understand. The five terms we’ll consider in this article include discounts, valuation caps, pre-money or post-money, pro-rata rights, and the most favored nations provision.

Discount

SAFE agreements can include a discount. The discount is used if the SAFE investor money converts in future financing rounds and the valuation was at or below the valuation cap. For example, a 20% discount rate means an investors money would buy shares at a $8m valuation if the priced round was $10m (20% discount).

Valuation Cap

Valuation caps are another common term in SAFE agreements that invesors can use to obtain a more favorable price per share in the future by setting a maximum convertible price. They reward investors for taking on additional risk.

As an example, suppose a startup is raising capital at a $10m valuation and the SAFE investor had a valuation cap of $5m. In that case, SAFE investors shares convert at the valuation cap ($5m) despite the startup has just been valued at a $10m valuation. SAFE investors are typically happy if the valuation cap comes into play.

Pre-Money or Post-Money

Pre-money or post-money refers to valuation measurements that help investors and founders understand how much a company is worth. It’s one of the most essential terms in a SAFE agreement. Pre-money means the valuation is before new investor money. Post-money means the valuation includes the capital raised in that round.

Here is an article about pre-money and post-money valuation.

Pro-Rata Rights

Pro-rata rights allow investors to add more funds to maintain ownership percentage rights following equity financing rounds. The investor will pay the new price versus the original price. These rights are an excellent way to keep strong investors motivated to move forward with their investment over the long term.

Most-Favored Nations Provision

Most-favored nations provisions (MFNs), also known as non-discrimination clauses, require startups to give the same privileges to all investors. For example, if convertible securities are issued to future investors at better terms, the previous investors will also receive those same terms.

For example, if you invest in a startup at a 20% discount and $3m valuation cap, and a future investor receives a 30% discount, you will automatically receive the 30% discount.


Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

SAFE Agreement vs. Convertible Note

SAFE agreements are different from convertible notes. The former is a contractual agreement that could convert into equity in a future financing round, while the latter is short-term debt that converts into equity. However, they’re similar due to simplicity and flexibility, which is attractive to both investors and startups.

Here’s a closer look at SAFE agreements vs. convertible notes below:

Difference 1. Interest Rates and Maturity

In some circles, SAFE agreements are superior to convertible notes for the simple fact that they aren’t debt. As such, investors don’t have to worry about interest rates and maturity dates. In contrast, convertible notes involve both of these elements.

Many startups would prefer not to have debt on their balance sheet.

Comparison 2. Structure

SAFEs also act as a standalone instrument that works in concert with other SAFE agreements purchased by new investors in the future at different dates and amounts. Convertible notes can be structured as a standalone or a series.

Comparison 3. Risk and Tolerance

The risk and tolerance of SAFE agreements contrast convertible notes. Investors aren’t necessarily familiar with convertible notes or may feel unsure about SAFE agreement tax implications. The standard for simple, flexible investment instruments is convertible notes.

Comparison 4. Options

The relative recency of SAFE agreements allows them to function as a standardized arrangement. In short, they’re more similarly structured from investment to investment. Convertible notes, on the other hand, come in many forms, which increases investing flexibility.

Which Is Better? SAFEs or Convertible Notes

The type of instrument you choose depends upon the startup and investor. Understanding the pros and cons of either one will help you understand why they’re used and, potentially, which one will work well for you. Venture capital lawyers can also become a wealth of information and insight to startups and investors alike.

Is a SAFE Agreement Debt or Equity?

SAFE agreements are neither debt nor equity. Instead, they’re the contractual rights to future equity. These rights are in exchange for early capital contributions invested into the startup. SAFE agreements allow investors to convert investments into equity during a priced round at some future point.

It’s also worth noting that SAFE agreements are advanced, high-risk instruments that may never turn into equity. They don’t accrue interest, nor are startups required to repay investors if they fail.

How Are SAFEs Accounted For?

Companies should generally account for SAFEs as a long-term liability. The reason for SAFE agreement accounting working in this manner is that they require startups to deliver an unknown number of future shares at an undisclosed price. As a result, more definitive numbers cannot be established performance indicators come into fruition.

The Security and Exchange Commission (SEC) also warns that investors should be careful when using SAFE agreements. While they can be structured simply, you should remember that they are not all created equally. In addition, triggering liquidity events may never happen either.

However, when a SAFE agreement goes smoothly, investors’ rights are generally greater than common stock shareholders. As such, SAFEs offer preferential rights, which are extremely attractive to experienced investors.

Get Help with SAFE Agreements

Due to the complexities associated with SAFE agreements, you must draft the terms and conditions accordingly. Once you sign the agreement, then a complete and bonafide deal is in effect. Securities lawyers possess a strong command of finance law and a wide range of experiences with startups. Ensure you seek their legal counsel before offering or accepting a SAFE agreement. Post your project today to get help with a SAFE agreement.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our SAFE Agreement Lawyers

View Kristen
Member Since:
January 10, 2022

Kristen R.

Freelance Attorney
Free Consultation
Get Free Proposal
Wyoming
14 Yrs Experience
Licensed in WY
University of Wyoming

Transactional and Employment Attorney and Small Business Owner. I do inside counsel work from the outside. I demystify the law for my clients.

View Amos
Member Since:
January 13, 2022

Amos M.

Principal
Free Consultation
Get Free Proposal
Nashville, TN
14 Yrs Experience
Licensed in GA, TN
Mississippi College School of Law

Since 2008, I have worked to assist clients in solving problems and addressing challenges that inevitably arise as a business grows - both anticipated and unexpected. My experience in Georgia and Tennessee in both drafting contracts and enforcing them via litigation and/or arbitration has provided clients with unique insights that help them anticipate problems and inform their decisions from start to finish.

View Leah
Member Since:
January 18, 2022

Leah C.

Attorney
Free Consultation
Get Free Proposal
Alabama
7 Yrs Experience
Licensed in AL
Birmingham School of Law

I am an attorney licensed in Alabama and have been in solo practice for 7 years. I have experience in Contracts drafting and review, Litigation and Immigration practice areas. I am available for new projects.

View Meghan
Member Since:
January 31, 2022

Meghan T.

Partner
Free Consultation
Get Free Proposal
Atlanta
3 Yrs Experience
Licensed in GA
Emory University

Meghan Thomas is an accomplished transactional attorney. She specializes in real estate transactional matters, property disputes, IP, tech and media contracts. Meghan's innovative leadership style has attributed to the firm's rapid development and presence in the metro-Atlanta market. She obtained her Doctor of Law from Emory University where she worked with the State Attorney General and litigated property disputes for disadvantaged clients. ​ Prior to practicing, Meghan negotiated complex transactions for Fortune 500 tech and healthcare companies. She lives with her family in Southwest Atlanta, enjoys cooking, travel, dance and continues to develop her research in the areas of transactional law and legal sustainability.

View Cecilia
Member Since:
January 31, 2022

Cecilia O.

Contracts Attorney
Free Consultation
Get Free Proposal
San Antonio
15 Yrs Experience
Licensed in CT, MD
Ghana School of Law

With 15 years of extensive transactional/contracts experience reviewing and negotiating commercial contracts including a wide variety of purchase orders and contracts and non-disclosure agreements (NDA), I believe I can immediately contribute to the continued success of your team. I have been commended for a range of valuable skills—excellent contract management and contract administration, legal research, risk analysis, drafting and negotiations, and strategic thinking. I have worked as a legal consultant for 10+ years and I have reviewed over 7,500 contracts through this position. Contracts I have reviewed include but not limited to purchase orders, commercial and construction contracts, equipment rental agreements, non-disclosure, confidentiality, vendor agreements, service agreements, site access agreements, international agreements, request for proposals (RFP), bids and government contracts. These experiences have enabled me to master the ability to work independently and expeditiously to identify and assess issues and provide legally sound recommendations, consistent with good business practices. I have led teams (sales, insurance and management) to successfully negotiate contract terms with customers. Effective Communicator and Negotiator. I am a people person, and for the past 13 years, I have acquired excellent oral and written communication skills that enable me to interact and negotiate effectively with stakeholders at all levels. I am a self-starter with a strong work ethic. I have a high degree of resourcefulness, diligence, and dependability. Most important, I adapt to changing priorities quickly, thriving in an environment with high volume and short turnaround deadlines. My experience over the years allows me to transfer my skills to all types of contracts to meet the client’s needs. I am hopeful to provide similar legal expertise, effective contract administration and leadership to your organization. It would be a pleasure to meet within the next few weeks and discuss how my qualifications, experience, and capabilities will best fit the needs of your outfit.

View Mathew
Member Since:
February 1, 2022

Mathew K.

Founding Attorney
Free Consultation
Get Free Proposal
Illinois
7 Yrs Experience
Licensed in IL
DePaul University College of Law

Kerbis' practice includes business and real estate transactions, estate planning, and limited scope litigation consulting. Mathew has negotiated deals involving multinational corporate franchises and has collectively helped hundreds of clients with their transactional, civil litigation, and appellate legal needs. Throughout his tenure as an American Bar Association leader, Mathew has advocated for legal education reform, interviewed ABA Presidents and State Appellate and Supreme Court Justices, and lobbied Congress on behalf of the legal profession. As a law student, Mathew served as an extern for the Honorable Justice Robert E. Gordon of the Illinois Appellate Court, First District.

View Tina
Member Since:
February 17, 2022

Tina R.

AGC
Free Consultation
Get Free Proposal
Arlington, VA
15 Yrs Experience
Licensed in DC, IL, VA
Loyola University Chicago

15 years for legal experience; expertise in contracts, healthcare, ERISA, physicians, financial services, commercial contracts, employment agreements, etc. I am adept at all contracts and can provide you with efficient and quality services. I have worked at a law firm, financial services company, consulting ,and non-profit.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call