Simple Agreement For Future Equity Discount

The exact conditions of a SAFE vary. However, the basic mechanism[1] is that the investor provides specific financing to the company when it is signed. In return, the investor will subsequently receive shares of the company related to certain contractual liquidity events. The primary trigger is usually the sale of preferred shares by the company, typically as part of a future price increase cycle. Unlike a direct share purchase, shares are not valued at the time of signing the SAFE. Instead, investors and the company negotiate the mechanism by which future shares will be issued and postpone the actual valuation. These conditions typically include an entity valuation cap and/or a discount on the valuation of the shares at the time of the triggering event. In this way, the SAFE investor is insequential in the upward trend of the company between the date of signature of the SAFE (and the financing provided) and the trigger. To complicate matters a bit, a SAFE sometimes has a discount. Since safe arrives later in front of each investor, the SAFE investor might want safe to be converted into equity with a discount on the subsequent funding cycle.

Discounts are usually between 10 and 30%. To illustrate, I modeled what a 50% discount will look like. Instead of buying shares at 1.00 $US, the SAFE holder can buy shares at 0.50 $US. Here`s an example: Y Combinator, a well-known technology accelerator, created the SAFE (Simple Agreement for Future Equity) rating in 2013