SAFE agreements are a relatively new type of investment created by Y Combinator in 2013. These agreements are concluded between a company and an investor and create potential future capital in the company for the investor in exchange for immediate money to the company. SAFE turns into equity in a subsequent funding cycle, but only if a specific trigger event (as described in the agreement) takes place. The exact conditions of a SAFE vary. However, the basic mechanics[1] are that the investor makes available to the company a certain amount of financing at the time of signing. In return, the investor will later receive shares in the company in connection with specific contractual liquidity events. The main trigger is usually the sale of preferred shares by the company, usually as part of a future fundraising cycle. Unlike direct equity acquisition, shares are not valued at the time of SAFE signing. Instead, investors and the company negotiate the mechanism with which future shares will be issued and defer actual valuation. These conditions generally include an entity valuation cap and/or a discount on the valuation of the shares at the time of triggering. In this way, the SAFE investor participates above the company between the signing of safe (and the financing provided) and the triggering event.

For a growing start-up, the company will probably find more money. As a start-up investor, I`m not interested in being reimbursed. The risk associated with a start-up is high, so I hope that in the event of a high risk, there will be a potential for a strong upward trend. That is why I would like my SAFE to be “converted” to equity at a later date. Basically, as soon as someone decides to invest in the company in a “price cycle”, my SAFE becomes shares of the company. Mohsen Parsa, a los Angeles start-up lawyer, helps clients understand SAFE agreements, design comprehensive SAFE agreements for clients, and provide general guidance and guidance to these types of agreements so that startup clients can make the best short- and long-term decisions. Here`s a look at SAFE agreements and why they are important to startups, but if you have specific questions about your SAFE agreements or the conclusion of such agreements, contact Parsa Law, Inc. At the end of 2013, Y Combinator released the Simple Agreement for Future Equity (“SAFE”) investment instrument as an alternative to convertible debt.

[2] This investment vehicle is now known in the U.S. and Canada because of its simplicity and low transaction costs. However, as use is increasingly frequent, concerns have arisen about its potential impact on entrepreneurs, particularly where several SAFE investment cycles take place prior to a private equity cycle[4] and the potential risks to un accredited crowdfunding investors who could invest in the SAFes of companies that realistically never receive venture capital financing and therefore never generate equity in equity. [5] Unlike converting debt, there is no debt with a safe. There is also no maturity date, which means that investors have to wait indefinitely before they can get their hands on the equity they have purchased, if they do. With participation rights or participation rights, investors can invest additional funds to maintain their ownership during equity financing after the financing that initially converted SAFE into equity.