The startup (or any other company) and the investor enter into an agreement. They negotiate things like: Experienced angel investors are skeptical about issuers` willingness to offer sufficiently generous discounts. Given the much higher risk than seed stage investors compared to later stage investors, a 10 or 15% discount doesn`t seem like a big reward for discerning fishing investors. Try 50%, which would represent a double jump in valuation from the CF cycle to the liquidity event, quite reasonable if the time between events is unlimited. To understand what a SAFE is, it is important to know what it is not. It is not a debt instrument. Nor are they common shares or convertible bonds. However, SAFE`s convertible bonds are similar, as they can both provide equity to the investor in a future preferential share cycle and contain valuation caps or discounts. However, unlike convertible bonds, there is no interest and has no maturity date and, in fact, they may never be triggered to convert safe into equity. 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 equity in the company for the investor in exchange for immediate liquidity for the company.
Safe converts into equity in a subsequent funding round, but only if a particular triggering event (described in the agreement) occurs. Unlike convertible bonds, there is no debt with a SAFE. There`s also no maturity date, which means investors have to wait indefinitely before they can get their hands on the equity they buy – if that ever happens. The SAFE is a kind of warrant that gives investors the right to obtain shares of the company, usually preferred shares, if and if there is an upcoming valuation event (i.e. the next time the company increases, acquires “valued” equity or submits an IPO). In addition to the absence of valuation requirements, such as convertible bonds. B the terms of the SAFE arrangement may include valuation caps and share price discounts in order to offer a lower price per share than subsequent venture capital (VVC) investors or acquirers at that liquidity event. .