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Demystifying the SAFE agreement
"SAFE" stands for "Simple Agreement for Future Equity".
As the name suggests, SAFE agreements are simple to understand. In plain terms, A SAFE allows companies, primarily startups, to raise funds in exchange for future ownership in the company (shares).
When will the SAFE Agreement be converted to shares?
The SAFE agreements will be converted to shares once the company goes through the valuation process, and raises funds on that valuation, at a future fundraising round.
SAFE agreements are ideal for both pre-seed and seed stage companies because they avoid subjective discussions around valuation and tedious negotiations, which can save a fortune in terms of time and money. Equity Investment platforms, such as Maydan Capital, provide SAFE agreements which aim to deliver the best value to both investors and founders.
- Simplicity:
SAFE agreements are ideal instruments for startups.
The simplicity of this instrument prompts both investors and companies to consider SAFE agreements among their initial sources of financing.
In the SAFE agreement, only two things are negotiated, the investment amount and valuation cap (which indicates the highest conversion price). - Smaller in size:
Compared to a full equity round, if the company fails, the investor loses less money.
Due to the smaller size, for issuers it is quicker to raise funds. For example, a typical equity fundraise may be £500,000 but the same company can raise investment via a SAFE of £100,000 resulting in faster execution. - Shariah-compliant:
SAFE agreements do not involve interest payments. Unlike bonds or convertible notes, SAFE is not debt. Therefore, it does not carry a maturity date and interest rate. Maydan Capital ensures all SAFE agreements are aligned with Shariah.
- Risk:
- Similar to most investment instruments, the SAFE agreement carries an element of risk to investors, especially when financing a startup or pre-seed company. Because there is no guarantee that the startup will grow into a profitable business, the investors will risk losing their money if the company fails.
- Returns:
- SAFE agreements do not yield higher investors' returns in the early stages. Since SAFEs do not provide dividend payments, the investors will have to wait until the company develops to benefit from their investment.
- Investors benefit from a cap in valuation or a discounted valuation of the company at the future equity round.
- The startup is raising £150,000 via a SAFE Agreement. The startup has identified this is the amount they need to develop their product and progress.
- The startup has set a valuation cap at £3.2 million for future conversion of the SAFE. The expected valuation at the next full fundraising round is £10 million, meaning the value of the £150,000 is multiplied at 3.1x, giving a greater number of shares at the future fundraising round.
- Simplifies the process of start-up investment
- Provides a fair middle-ground between investors and raisers through valuation caps
- Speeds up the process of fundraising through faster execution
- No interest payments