Glossary Term
SAFE (Simple Agreement for Future Equity)
Definition
A Simple Agreement for Future Equity (SAFE) is a financial contract between an investor and a startup company in which the investor provides capital in exchange for the right to receive equity in the company at a later date, typically during a future financing round. Unlike traditional equity financing, a SAFE does not establish an immediate equity stake in the company but instead converts into equity when a specific triggering event occurs, such as the next priced round of investment, an acquisition, or an IPO. SAFE agreements are commonly used in early-stage funding rounds due to their simplicity, speed, and flexibility compared to traditional convertible notes or equity investments.
Relevance to the MedTech Industry
SAFEs provide startups with a simple, efficient way to raise capital without the complexities of negotiating a valuation or the immediate issuance of equity. For investors, a SAFE offers a way to participate in the upside potential of a company, converting their investment into equity at a later stage, often at a discounted price or with other favorable terms. This structure is often used in seed-stage or early-stage financing, providing startups with the funds they need to grow while delaying the valuation and equity issuance until later.
Additional Information & Related Terms
Key Components of a SAFE
Valuation Cap:A valuation cap is the maximum valuation at which the investor’s SAFE will convert into equity. It ensures that early investors are rewarded if the company’s value increases significantly before the next financing round. This cap protects investors from excessive dilution.
Discount Rate:The discount rate allows the investor to convert their SAFE into equity at a discounted price relative to the price paid by investors in the next funding round. This is typically in the range of 10-30% and reflects the early risk undertaken by the investor.
Conversion Trigger:The SAFE agreement specifies a trigger event, such as the next round of equity financing (Series A), an acquisition, or an IPO, which will trigger the conversion of the SAFE into equity. This event typically happens within a few years of the agreement.
No Interest or Maturity Date:Unlike traditional convertible notes, SAFEs do not accrue interest and do not have a maturity date. This makes SAFEs simpler and more flexible, as there is no obligation to repay the investor if the company does not raise additional funds within a certain period.
Related Terms
Convertible Note: A form of debt that converts into equity at a later date, typically during a future financing round, with terms similar to those of a SAFE, but with the addition of an interest rate and maturity date.
Equity Financing: A method of raising capital by selling ownership shares in the company, in contrast to SAFE or debt-based funding.
Valuation Cap: A feature in both SAFEs and convertible notes that sets the maximum valuation at which the investment will convert to equity, ensuring early investors are rewarded for their risk.
Discount Rate: A reduction applied to the future price of equity in a SAFE or convertible note, allowing investors to convert at a lower price than the next round’s investors.
Seed Round: The initial stage of funding for a startup, often used to develop early products or technologies, where SAFEs are commonly used to raise capital.