- When is it suitable to use a SAFE note?SAFE notes are most suitable for seed funding rounds (which is first round where a startup raises capital from external investors).
- What are the benefits of using SAFE notes?
The benefits of using SAFE notes are:
1. faster negotiations due to the simpler nature of the document; and
2. startups can close with an investor as soon as both parties are ready to sign and the investor is ready to transfer the investment amount (instead of trying to coordinate a single close with all investors simultaneously).
- What are the downsides of SAFE notes?
The downsides of SAFE notes are:
1. SAFE notes do not have maturity dates, so it is possible that a SAFE note will never convert into equity; and
2. SAFE notes restrict investors from transferring their rights under a SAFE note, so a SAFE note will be an illiquid investment until it is converted into shares (and even then, the investors will be subject to any pre-emptive rights contained in the applicable shareholders’ agreement or company constitution).
- Are SAFE notes commonly used in Australia?Although priced equity rounds are more common in Australia, SAFE notes are gaining popularity due to the reduced negotiation time involved.
- What is an uncapped SAFE note?An uncapped SAFE note is where an investor pays their investment amount to the startup upfront, and then the SAFE note converts into shares at the same price as priced equity round. This type of SAFE agreement is not common because the investor receives no reward for providing their investment amount before the priced round.
- SAFE note vs equity: what is the difference?A straight equity round is where a valuation is set and the investor receives a fixed amount of shares in exchange for their investment amount. Under a SAFE note, however, no valuation is set and the number of shares that will get issued to the investor gets determined on conversion of the SAFE note into shares.
- Why is it important to get a SAFE Note reviewed by a lawyer?Yes. Although Y Combinator originally developed the concept of the SAFE note, we commonly see agreements titled “Simple agreement for future equity” that contain detrimental features not envisaged by the Y Combinator SAFE note.