What is a SAFE note agreement
SAFE, or Simple Agreement for Future Equity (also referred to as SAFEnote), is a type of investment contract used by startups to raise capital from investors. It allows investors to invest money in a startup in exchange for the promise of future equity. In other words, it's a way for startups to raise money without having to give away equity right away.
If you're a startup founder, you know that raising capital is one of the most crucial and overwhelming steps in the early stages of your business. SAFE is invented by Y Combinator in 2013 specifically to give early-stage startups an alternative to traditional ways of raising funds like equity or debt. SAFEstreamlines the fund raising process and reduces legal complexities.
"Simple" is the operative word with SAFEnotes. More and more startup founders use SAFEnotes precisely because it's simple , cost-efficient, and easy to implement. It allows startups to access funds fast without diluting their ownership upfront, which is particularly beneficial in the early stages when equity is most valuable.
Benefits of usingSAFE notes
A Simple Agreement for Future Equity is a legal document that outlines the terms of investment. The investor provides capital to the startup in exchange for the right to receive equity at a future date or event, such as a subsequent financing round or an acquisition.
Unlike traditional equity investments, a SAFE agreement does not specify a valuation of the company at the time of the investment.
There are several benefits to using a SAFE agreement template for your startup:
- No debt. Unlike traditional loans, a SAFE agreement does not require startups to make regular interest payments or repay the investment amount.
- Flexible terms. A SAFE agreement allows startups to customize the terms of the investment to their specific needs and preferences.
- Easy to understand. A SAFE agreement is a straightforward document that is easy to understand for both startups and investors.
How does a SAFE agreement work
A SAFE Agreement has two key components - the investment and the conversion. When an investor invests in a startup using a SAFE Agreement, they're essentially giving the startup money in exchange for the promise of future equity. The amount of equity is not determined at the time of the investment and will be determined in the future when a triggering event occurs.
A triggering event is an event that triggers the conversion of the SAFE Agreement into equity. Common triggering events include an acquisition, an IPO, or a subsequent equity financing round. When a triggering event occurs, the investor's investment is converted into equity at a predetermined valuation.
SAFEnote template
SAFE (Simple Agreement for Future Equity) is a flexible, founder-friendly way to grant an investor the right to acquire equity in a future financing round. This streamlining early-stage fundraising by simplifying terms and reducing legal complexities.
Cake has a built-in SAFEnote template that you can use and customize to your requirements. The SAFEnote template includes the following components:
- Company details
- Investor details
- Investment amount
- Valuation cap
- Discount rate
- Trigger events
- Termination clauses
- Digital signing
- Warranties
Cake does not only provide SAFEnote templates, it also has tools that allows startup founders to model capital raises, play around with their cap tables,and see the impact a SAFEnote could have for your unique scenarios.
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FAQs on SAFEnotes
1. Is a SAFE note a legally binding document?
Yes, a SAFE note is a legally binding document that outlines the terms and conditions of the investment agreement between the startup and the investor.
2. Does a SAFE note have a maturity date?
No, a SAFE note does not have a maturity date or an interest rate. It provides investors with the right to receive equity in the future, subject to the occurrence of a future event.
3. What happens if the qualifying event never occurs?
If the qualifying event never occurs, the investor does not receive any equity in the company, and the startup is not required to repay the investor's investment.
4. Can a SAFE note be converted into debt?
No, a SAFE note cannot be converted into debt. It is an equity instrument that provides investors with a right to equity in the future.
5. Can a SAFE note be sold to a third party?
Yes, a SAFE note can be sold to a third party, subject to the terms and conditions of the agreement.
6. Are SAFE notes taxable?
Yes, SAFE notes are subject to taxation. Investors must pay taxes on any capital gains they receive from the investment.
