Safe Agreement Risks

A SAFE is an agreement between you, the investor and the company, in which the company usually promises to give you a future stake in the company in the event of specific triggering events. Not all SAFs are the same and the very important conditions for obtaining future equity may vary between SAFs that are offered in different crowdfunding offers. Despite its name, a SAFE may not be “simple” or “safe”. Y Combinator, a well-known technology accelerator, created the SAFE rating (simple agreement for future equity) in 2013 and uses it to fund most of the Seed phase startups participating in its three-month development meetings. Since 2005, Y Combinator has funded more than 1,000 startups, including Dropbox, Reddit, WePay, Airbnb, and Instacart. In the past, most startups were financed either by offering equity or by loans in the form of convertible bonds. However, hybrid tools have recently been put in place to fund startups. The most remarkable and very popular today is the use of an instrument called SAFE. “SAFE” is an acronym for “simple agreement for future equity”. A SAFE is a contract intended to obtain an amount of equity fixed in a future price cycle for which the investor pays the purchase price in advance. The SAFE was developed and published by Y Combinator at the end of 2013 and aims to offer a more efficient, clearer and simpler alternative to convertible bonds, especially in the absence of certain aspects (including a fixed maturity, an interest rate and a maturity date).

Despite their name, FAS are not always as “simple” as expected and are not necessarily “for future equity” if the conversion never takes place. Below we discuss the pros and cons of SAFEs when it comes to businesses and investors. Recently, we have seen that SAFE agreements have been made in Oklahoma agreements that we have considered. As investors, SAFEs complicate the operation, both in terms of the valuation of the company and the management of the company`s previous capitalization. This makes it more difficult to structure an agreement, which can reduce the interest of some venture capitalists and angel investors. A SAFE is not investor-friendly and may be the least “safe” investment instrument available to an early-stage investor. Without certainty that an investment will ever be converted into equity or returned by other means, investors should carefully consider whether their investment decision falls under situations where the use of a SAFE can be useful for an investor. .

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