“A Simple Agreement for Future Equity”
A SAFE is an investment instrument used by companies that creates a contract between themselves and investors and companies looking to purchase equity. These individuals make investments in exchange for the chance to earn a return—in the form of equity in the company—if the company experiences another round of financing, is acquired or has an IPO.
The SAFE was created by Y Combinator and can be infinitely customized.
Investors using the SAFE get a financial stake in the company, don’t immediately hold stock. Investments are converted to equity if certain “trigger events” occur, such as the company’s future financing, acquisition, IPO or another event pre-determined by the SAFE.
Risk note: trigger events are not guaranteed. They are only possibilities.
Remember, you cannot receive perks if you invest with your self-directed IRA due to tax laws.
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Your return depends solely on how much you invested, the company’s exit valuation (how much the company is worth if and when the trigger event happens), and the deal terms written on the SAFE.
Risk note: If there is never an exit valuation you may never get a return on your investment.
If a company chooses to use the SAFE they are allowed to customize it how they see fit, including or excluding certain provisions. Most include a valuation cap and a discount, others simply specify the price at which shares can be acquired in the future. If the SAFE includes both a valuation cap and a discount, the provision more favorable to the investor applies if there is ever a trigger event.
Investors can earn a return, if a trigger event occurs at a certain price threshold. Although trigger events sometimes happen earlier, many don’t occur for 4-6 years after the initial investment, and some take even longer.
Risk note: Investing is risky, so there’s no guarantee of a return on this kind of investment.
In general, you can only sell your SAFE in a private company one year from purchase date only if you find a buyer. However, if you plan to sell your security during the one-year period you may only transfer the security to the: (1) issuer of the security, (2) an accredited investor (someone with a net-worth of $1m or an annual income of $200,000 for two years), (3) as part of an offering registered with the SEC, or (4) to a member of the family of the purchaser or the equivalent, to a strut controlled by the purchaser, to a trust created for the benefit of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance.
In the event of a subsequent equity financing round, the company will generally convert the SAFE. Please consult the SAFE deal terms for further details.
When using the SAFE method of investing there are clear risks. One of the main risks is that if a company never has another round of fundraising or never goes public, the money invested is lost. In addition, there are no voting rights through the SAFE, even at dissolution. As a company raises money, the ownership interest of each past investor will be diluted.
The below are terms that can be potentially found in a SAFE, you may see all or some of them.
Price per share
The price per share shows the cost per share at the time the investment converts into equity shares or cash. This means that when a trigger event happens, investors receive equity shares or cash as if they had purchased shares at the time of the SAFE purchase at the specified price.
Valuation cap
The valuation cap specifies the maximum valuation at which the investment converts into equity shares or cash. This means that when a trigger event occurs, investors receive equity shares or cash at the valuation cap price—no matter the valuation at which the company sells. Therefore, the higher the valuation of the company at the time of sale, the greater the investor’s return.
Discount
If a trigger event for the company occurs, the discount provision gives investors equity shares (or equal value in cash) at a reduced price relative to what others pay at IPO or for the company’s acquisition. They get a larger advantage compared to investors not using Equity Portal Inc.
Common Stock is an investment instrument used by companies that creates a contract of ownership between an investor and the company. These individuals make investments in exchange for an ownership percentage based off their investments. Although there are no voting rights due to the fact that the ownership percentage is very small in the grand scheme, investors get paid in the form of annual dividends after an auditing for the SEC is done.
Investors using the Common Stock method get a financial stake in the company and immediately hold stock.
Risk note: Success in the stock is not guaranteed. Only a possibility.
Your return depends solely on how much you invested, the company’s earnings, and the deal terms written on the transaction.
Risk Note: A company’s earnings might not be always positive, and you may never get a return on your investment.
If a company chooses to use the common stock method, they are allowed to customize it how they see fit, including or excluding certain provisions. Most include an earnings cap and a discount, others even voting rights.
Below are the terms that can be potentially found in a Common Stock investment; you may see all of them.
Investors can earn a return if the company earnings are positive or above the deal terms set.
Risk Note: Investing is risky, so there’s no guarantee of a return on this kind of investment.
In general, you can only sell your common stock in a private company one year from purchase date only if you find a buyer. However, if you plan to sell your security during the one-year period you may only transfer the security to the: (1) issuer of the security, (2) an accredited investor (someone with a net-worth of $1m or an annual income of $200,000 for two years), (3) as part of an offering registered with the SEC, or (4) to a member of the family of the purchaser or the equivalent, to a strut controlled by the purchaser, to a trust created for the benefit of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance.
When using the Common Stock method of investing there are clear risks. One of the main risks is that if is never profitable, dividends will not be received. In addition, there are no voting rights through the Common Stock Method, even at dissolution. As a company raises money, the ownership interest of each past investor will be diluted.