SAFE stands for Simple Agreement for Future Equity. SAFEs are standardized contracts with few negotiable terms used by startup companies to raise money from investors. SAFEs are viewed by startup companies and investors as a simpler and less expensive way to complete early-stage fundraising compared to a typical, priced equity financing in which the company and its investors need to agree on a full-fledged set of investment terms and set a valuation for the company.
By investing in a company’s SAFE, an investor has the right to convert the amount they have invested into shares of preferred stock in a future equity financing round. Typically, the amount converts at a discount to the price per share of preferred stock paid by new investors buying shares in the future financing. The size of the discount depends on the “discount” or “valuation cap” terms of the SAFE. A SAFE also includes provisions covering the situation in which a company gets acquired before the SAFE is converted into preferred stock.
Unlike convertible notes, which are considered to be debt instruments, there is no expectation that SAFEs will be repaid by the issuing company. Furthermore, SAFE investments do not accrue interest and do not have a maturity date (i.e., a date upon which repayment of a debt is due).