All About SAFEs, from the 2 badass women who wrote them

Super early-stage companies rarely have a lead investor or a legal team and they want to raise funds in the simplest way possible. Unlike selling stock, SAFE agreements do not require either party to involve legal counsel– making them much less of a costly time suck for founders and investors.

It makes sense that information and voting rights aren’t covered with these agreements – it’s not stock yet. When the contract converts into preferred stock, SAFE investors will piggyback on the same rights that the lead investor in the priced round negotiates (alert: SAFE investor perk!)

SAFEs that include pro-rata rights give investors the right to buy more stock in future rounds to maintain their percentage ownership of the company.

Different versions of the SAFE agreement cover special situations. SAFEs which include a discount allow investors to negotiate a discount rate rather than the valuation cap. Some SAFEs include both a discount and a cap.

As the name suggests, uncapped SAFE agreements don’t have a target valuation nor a discount. This means there is no extra reward to sweeten the deal for early investors. This type of SAFE is often seen when a company has extreme demand and investors want to be as flexible as possible to get in on the action.

Lastly, there is a Most Favored Nation (MFN) SAFE which is uncapped but has an MFN clause stating that if a later investor negotiates a target valuation or a discount, then you get to amend your SAFE to take those same terms.

When a SAFE converts, the number of shares you get is equal to their investment amount, divided by the price per share. The price per share is equal to the valuation divided by the capitalization. What is the capitalization? The capitalization is the sum of the issued shares, the increase in the options pool, and the shares that the SAFEs have converted into.

Since the SAFE indicates how shares will convert rather than an exact number of shares, your percentage of ownership can’t be determined until the end of the priced round. This means it’s impossible to determine the size of the slice of the pie you will end up owning right away.

A price round can bring major changes. During a homerun merger, you can choose to convert your SAFE to common stock and participate in the proceeds of the merger. If an acqui-hire occurs and the company’s talent is bought, you can opt to just have your SAFE paid off. If the company fails altogether, your SAFE allows you to be in line before stockholders to get a payout (if there’s any money left for payouts).

For traditionally issued (ie. non-crowdfunding) SAFEs, Y Combinator suggests a “Handshake Protocol” to formally start the investment process. Founders typically email you to confirm both the investment amount and the cap to which you would respond affirmatively. Backing out after this point would do serious damage to your investor rep!

You shouldn’t treat the nitty gritty of your SAFE like an iTunes Terms of Privacy–read through to verify that you’re signing the SAFE that you think you are! For non-Wefunder SAFEs, also double-check your signature block for accuracy.

Note that a SAFE isn’t valid until you actually wire $ and that delaying the wire can be a huge headache for a founder. Don’t sign unless you’re primed and ready to wire the money!

Post-wire, don’t ghost from your founder! More often than not, they’ll appreciate your advice and guidance. That said, don’t overwhelm your founder either– you’ll only hinder their efficiency and, ultimately, the success of the startup.

An important note: you don’t need to be on the board of directors to be extremely helpful to the company & you’ll irk most founders trying to get yourself a seat.

When investing via any method, know your rights as an agreement holder and also the terms under which your contract will convert. Also, make sure you understand your ownership and where it actually comes from. Equipping yourself with this understanding will help you make smarter decisions and might protect you in the future.