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A Simple Agreement for Future Equity
A SAFE is an investment contract between investors and companies looking to raise capital. Individuals make investments in exchange for the chance to earn a return—in the form of equity in the company—if the company experiences another round of financing, conducts a token-generation event*, is acquired or has an IPO.
The SAFE was created by Y Combinator and can be customized infinitesimally. Generally, SAFEs are financial instrument widely used by angels and VCs investing in startups.
* Recently, companies in the blockchain space have started using SAFEs as a way to sell tokenized equity, you should read these SAFE specifically for the terms and conditions associated with conversion and the risks associated with holding shares on a blockchain.
Investors using the SAFE get a financial stake in the company, but are not immediately holders of stock. Investments are converted to equity if certain “trigger events” occur, such as the company’s future financing, acquisition, IPO or another event pre-determined by the SAFE.
Risk note: trigger events are not guaranteed. Investors should see them only as possibilities.
Your return depends on your investment amount, the company’s exit valuation (how much the company is worth if and when the trigger event happens), and the terms of the SAFE.
Risk note: If there is never an exit valuation you may never get a return on your investment.
Each company can customize its SAFE, including or excluding certain provisions. Most include a valuation cap and a discount, others simply specify the price at which shares can be acquired in the future. If the SAFE includes both a valuation cap and a discount, the provision more favorable to the investor applies if there is ever a trigger event.
The below are examples of terms found in a SAFE, you may see all or some of them.
Price per share
The price per share denotes the cost per share at the time the investment converts into equity shares or cash. This means that investors, when a trigger event occurs, receive equity shares or cash as if they had purchased shares at the time of the SAFE purchase at the specified price.
Valuation cap
The valuation cap specifies the maximum valuation at which the investment converts into equity shares or cash. This means that investors, when a trigger event occurs, receive equity shares or cash at the valuation cap price—no matter the valuation at which the company sells. Therefore, the higher the valuation of the company at the time of sale, the greater the investor’s return.
Discount
If a trigger event for the company occurs, the discount provision gives investors equity shares (or equal value in cash) at a reduced price relative to what others pay at IPO or for the company’s acquisition.
When can I expect a return?
Investors can earn a return, if a trigger event occurs at a certain price threshold. Although trigger events sometimes happen earlier, many don’t occur for 4-6 years after the initial investment, and some take even longer.
Risk note: Startup investing is risky, so there’s no guarantee of a return on this kind of investment.
Can I sell my SAFE?
In general, you can only sell a SAFE after one year from purchase date and only if you find a buyer, which might not be easy to do. Some SAFEs restrict liquidity further, check the terms and conditions.
Will my SAFE get converted in the startup’s next round?
In the event of a subsequent equity financing round, the company will generally convert the SAFE. Please consult the SAFE for further details.
Republic Core LLC (“Core”) provides technology and support services to OpenDeal Inc. and its affiliates (collectively, the “Republic Ecosystem”). Republic Note holders and as well as users of the site and services maintained by the Republic Ecosystem, regardless of and their activities on or relating to the Republic Ecosystem, are subject to the applicable terms of service, in their entirety.
Core is currently conducting an offering of Republic Notes under Rule 506(c) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) to persons who are accredited investors, as that term is defined in Rule 501. Only accredited investors are eligible to participate in the Rule 506(c) offering. Accredited investors who wish to participate in the Rule 506(c) offering should receive and review carefully the Private Placement Memorandum pertaining to that offering, as it contains important information for potential investors to consider prior to making an investment decision. Accredited investors who wish to participate in the Rule 506(c) offering will be required to (i) complete a subscription agreement, (ii) acknowledge that they have received and read the Private Placement Memorandum, and (iii) provide information verifying their status as accredited investors.
Core is also “testing the waters” with respect to the sale of Republic Notes under Regulation A of the Securities Act. The “testing the waters” process allows companies to determine whether there may be interest in an eventual offering of its securities to qualified purchasers under Regulation A. Core is not under any obligation to make an offering under Regulation A. No money or other consideration is being solicited for an offering under Regulation A at this time and, if sent, it will not be accepted.
Core may choose to make an offering to some, but not all, of the people who indicate an interest in investing, and that offering may or may not be made under Regulation A. For example, Core may choose to proceed with its offering under Rule 506(c) without ever conducting a Regulation A offering, in which case only accredited investors within the meaning of Rule 501 will be able to buy Republic Notes.
If and when Core conducts an offering under Regulation A of the Act, it will do so only once (i) it has filed an offering statement with the Securities and Exchange Commission (“SEC”), (ii) the SEC has qualified such offering statement and (iii) investors have subscribed to the offering in the manner provided for in the offering statement. The information in the offering statement will be more complete than any test-the-waters materials and could differ in important ways. Prospective investors who are interested in participating in the Regulation A offering must read the offering statement filed with the SEC, when that offering statement becomes publicly available.
No money or other consideration is being solicited at this time in connection with any potential Regulation A offering and, if tendered, will not be accepted. No offer to buy securities in a Regulation A offering can be accepted and no part of the purchase price can be received until an offering statement is qualified with the SEC. Any offer to buy securities may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance is given after the qualification date. Any indication of interest in Core’s offering involves no obligation or commitment of any kind.
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