Jump to Section
What Is a Simple Agreement for Future Equity?
A Simple Agreement for Future Equity (SAFE) is an investment structure, formalized through a financing contract, that allows early-stage startups to invest in themselves by raising capital through a process called seed financing rounds.
It provides investors the right to purchase a specified number of shares in the future from a company, at an agreed-upon price. This price is usually at the same valuation as other investors participating in the SAFE.
The term of the agreement is usually set at no more than seven years and generally includes a 1x return on investment if investors follow through with their commitment to becoming shareholders of record after a three-year holding period.
A SAFE is most commonly offered as part of a convertible note, or SAFE note — a short-term bank loan with an attached conversion option. This type of agreement is commonly referred to as an equity agreement and are formalized through an equity purchase agreement, or contract, that can include an equity commitment letter as well as an investor rights agreement.
Equity agreements protect both parties in a deal of this nature. SAFEs can be used by companies seeking growth capital from angel investors or venture capitalists as part of seed financing rounds.
Here is an article explaining more about a simple agreement for future equity.
What’s Included in a Simple Agreement for Future Equity?
The key terms of a SAFE include the investment amount, the valuation cap, and the conversion discount.
Investment Amount
The investment amount is the amount of money that the investor is investing in the company. Investors are attracted to companies with revenue and growth potential. If you can show investors that you have proof that customers are willing to pay for your product, they will feel more confident investing in you.
Demonstrate traction through metrics like daily active users, monthly recurring revenue (MRR), or sales pipeline. The investment amount is the total amount a startup receives from investors at one time. This figure often has multiple components such as:
- Equity. Equity refers to ownership in a company
- Convertible Debt. Convertible debt refers to funds received by a company that must be paid back with interest before equity financing can be raised again
Valuation Cap
The valuation cap is the maximum value of the company that the investor is entitled to purchase shares. This could be a lower value than the pre-money valuation of the company. The valuation cap may be set by either party; however, it is often set by investors to protect themselves from overvaluation.
- Pre-money valuation cap. This is calculated by multiplying the pre-money valuation by an agreed-upon multiplier (1x, 1.25x, 1.5x).
- Post-money valuation cap. This is calculated by multiplying the post-money (including preferred shares) by an agreed-upon multiplier (1x, 1.25x, 1.5x). For example, A company has been valued at $1 million pre-money and $4 million post-money with a 1x multiplier for preferred shareholders. The investor would then have a right to purchase $3 million worth of shares at $4 million post-money ($4-$1).
Conversion Discount
The conversion discount is the percentage discount that the investor receives on the shares that they purchase. For example, if an investor purchases 100,000 shares at $1.00 per share and their investment has a 5% conversion discount, then they’d receive 95,000 of those shares at $0.95 per share. In this case, they would own 95,000 shares and still have 5,000 left to convert.
Here is an article about what startups should know about a SAFE agreement.
Image via Pexels by Essow
Types of Simple Agreements for Future Equity
Valuation cap, no discount.
The most common type of SAFE is the valuation cap, no discount SAFE. This type of SAFE does not provide the investor with a discount on the shares that they purchase.
Valuation cap, with discount.
Another type of SAFE is the valuation cap, with discount SAFE. This type of SAFE provides the investor with a discount on the shares that they purchase. The discount is usually between 10% and 20%.
No valuation cap, with discount.
The third type of SAFE is the no valuation cap, with discount SAFE. This type of SAFE does not have a valuation cap but does provide the investor with a discount on the shares that they purchase. The discount is usually between 10% and 20%.
No valuation cap, no discount.
The fourth and final type of SAFE is the no valuation cap, no discount SAFE. This type of SAFE does not have a valuation cap and does not provide the investor with a discount on the shares that they purchase.
Here is an article outlining what a SAFE is.
What Is the Purpose of a Simple Agreement for Future Equity?
A SAFE is an agreement between an investor and a company that allows the investor to purchase shares in the company at a future date. The agreement is called SAFE because it is a simple agreement that does not have the same terms and conditions as a traditional investment agreement.A SAFE allows a company to raise money from investors without having to go through the traditional equity financing process. This can be a helpful tool for companies that are not ready to go through the equity financing process or for companies that want to raise money quickly.
Here is an article outlining five key things you should know about a SAFE agreement.
Are SAFEs Equity or Debt?
SAFEs are structured with a company's equity as the underlying asset. This means that SAFEs are considered to be equity instruments rather than debt instruments. This is because the equity agreement does not require the company to pay back the investment, with interest, as a debt instrument would.
Here is an article about equity investments vs. convertible debt instruments.
How Does a Simple Agreement for Future Equity Work?
A company will issue a SAFE to an investor in exchange for an agreed-upon price. The SAFE will have a valuation cap and a conversion discount. The valuation cap is the maximum amount of money that the investor can pay for the shares. The conversion discount is the percentage discount that the investor will receive on the shares.The investor will be able to purchase the shares at the valuation cap price at a later date. The shares will convert into equity at a later date, usually when the company raises money through a Series A financing round.
Here is an article outlining key terms and explaining how SAFE agreements work.
Advantages and Challenges of Using a Simple Agreement for Future Equity
One of the main advantages of using a SAFE is that it is a quick and easy way to raise money. SAFEs can be issued in a matter of days, whereas a traditional equity financing round can take weeks or even months to complete.Another advantage of using a SAFE is that it can help a company to avoid some of the costly and time-consuming aspects of the equity financing process, such as hiring a financial advisor or going through a due diligence process.One of the challenges of using a SAFE is that it can be difficult to predict how much money a company will raise. This is because the valuation cap is not set in stone and can change over time.Another challenge of using a SAFE is that it can delay the equity financing process. This is because the investor will not be able to convert the SAFE into equity until a later date, usually when the company raises money through a Series A financing round.
Here is an article outlining the pros and cons of SAFE agreements.
Post a project in ContractsCounsel’s marketplace to receive flat fee bids from lawyers for your project. All lawyers have been vetted by our team and peer-reviewed by our customers for you to explore before hiring.
Need help with a Simple Agreement for Future Equity?
Meet some of our Simple Agreement for Future Equity Lawyers
Zachary J.
I am a solo-practitioner with a practice mostly consisting of serving as a fractional general counsel to growth stage companies. With a practical business background, I aim to bring real-world, economically driven solutions to my client's legal problems and pride myself on efficient yet effective work.
Jeremiah C.
Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
Kenneth G.
I build legal solutions which create extraordinary value for my clients. I am a partner in Alliance Law Firm International PLLC in Washington. My specialties include tax, wealth management, estates, corporations/business, venture capital, private equity, and natural resources. Prior to practicing law, I had a decade-long career in international private equity and investment banking. I have worked on building and managing companies in technology, energy, materials, retail, and natural resources. I am licensed to practice in the District of Columbia and Pennsylvania. I have degrees from the Georgetown University Law Center (JD) and the Yale School of Management (MBA).
October 3, 2023
Gunnar C.
I am a multifaceted lawyer, experienced in corporate law, nonprofits, private equity, real estate, financial services, taxation, trust and estate planning, and philanthropy. I am a strategic thinker and cross-functional collaborator who understands the importance of balancing revenue needs with business-minded legal counsel. I am skilled and experienced in preparing and reviewing SaaS agreements, service and vendor agreements, confidentiality, NDAs, data privacy, IP, licensing, real estate transactions, and partnership agreements.
October 5, 2023
Gina S.
Experienced business attorney in the field of real estate, construction, and design.
October 4, 2023
Neil B.
Family Law attorney with focus on Divorce Mediation
October 4, 2023
Angela P.
I am an experienced New York Real Estate Attorney and Florida Licensed Title Agent with extensive knowledge in the Real Estate industry. With more than 20 + years and over 2500 closed transactions, I have become an expert at accurately assessing realtors', lenders' & investors' needs and proposing/implementing viable solutions that bring value to them. I focus on real estate settlement services, education, and training of real estate professionals. I am also skilled working with high-end clients, managing large and complex projects, building solid relationships, effectively and creatively solving complex issues, producing results under stress all with impeccable customer service.
Find the best lawyer for your project
Browse Lawyers NowNeed help with a Simple Agreement for Future Equity?
Financial lawyers by top cities
- Austin Financial Lawyers
- Boston Financial Lawyers
- Chicago Financial Lawyers
- Dallas Financial Lawyers
- Denver Financial Lawyers
- Houston Financial Lawyers
- Los Angeles Financial Lawyers
- New York Financial Lawyers
- Phoenix Financial Lawyers
- San Diego Financial Lawyers
- Tampa Financial Lawyers
Simple Agreement for Future Equity lawyers by city
- Austin Simple Agreement for Future Equity Lawyers
- Boston Simple Agreement for Future Equity Lawyers
- Chicago Simple Agreement for Future Equity Lawyers
- Dallas Simple Agreement for Future Equity Lawyers
- Denver Simple Agreement for Future Equity Lawyers
- Houston Simple Agreement for Future Equity Lawyers
- Los Angeles Simple Agreement for Future Equity Lawyers
- New York Simple Agreement for Future Equity Lawyers
- Phoenix Simple Agreement for Future Equity Lawyers
- San Diego Simple Agreement for Future Equity Lawyers
- Tampa Simple Agreement for Future Equity Lawyers
ContractsCounsel User
create a S.A.F.E. Note
Location: Florida
Turnaround: Less than a week
Service: Drafting
Doc Type: SAFE Note
Number of Bids: 4
Bid Range: $695 - $1,350
User Feedback:
ContractsCounsel User
Drafting a contract for an early investor in a start-up
Location: Delaware
Turnaround: Less than a week
Service: Drafting
Doc Type: SAFE Note
Number of Bids: 2
Bid Range: $700 - $2,250
related contracts
- Accredited Investor Questionnaire
- Adverse Action Notice
- Bridge Loan
- Bridge Loan Contract
- Collateral Assignment
- Commercial Loan
- Convertible Bonds
- Convertible Note
- Convertible Preferred Stock
- Cumulative Preferred Stock
other helpful articles
- How much does it cost to draft a contract?
- Do Contract Lawyers Use Templates?
- How do Contract Lawyers charge?
- Business Contract Lawyers: How Can They Help?
- What to look for when hiring a lawyer