How Safe is SAFE?

The tools for startup financing develop over the years. Recently, the tool that becomes more and more popular for startups financing is the SAFE – Simple Agreement for Future Equity. In the Safe framework, the investor grants the company an investment and in consideration receives from the company an obligation to be issued shares upon the occurrence of a round (usually at a discount and subject to a maximum price). The SAFE is considered a financing tool favorable to the startup and founders.

What Should Investors Note?

The typical SAFE is not a simple tool. It is a 6 pages legal document full of definitions, detailing when and how the loan shall convert in a variety of scenarios. In several cases, I was involved in SAFE negotiations that lasted for weeks.

Different law firms and startups use different SAFEs, which means not all SAFEs are identical. Thus, it is impossible to treat the SAFE as standard. For example, recently I was consulted by a group of investors that signed “standard” SAFEs that did not refer to conversion upon an acquisition of the startup – guess what happened …

Usually, the SAFE is made with one investor, while additional SAFE are signed in different times with other investors. In the SAFE versions customary in Israel, there are no provisions between the SAFE and the other SAFEs. Around the time an investor signs a SAFE, other investors may sign a SAFE with better conditions for the other investor or that even dilutes the first investor.

The typical SAFE convertes upon the earlier of an investment round in which the startup issues preferred shares or the acquisition of the startup. Thus, there are extreme (but not few) situations in which the SAFE shall not be converted at all. For example, startups that succeed without raising through issuance of preferred shares and are not acquired. Those are frequent, but I have come across them several times.

What do the Founders have to Note?

Over usage of SAFEs and the like, caps that are too low or discounts that are too large may result in complexity in the startup’s share capital and excessive founders dilution. For instance, I recently stumbled into a case where in light of the discounts and investment amounts under SAFEs, the result of a new investment round would be that the SAFE investors hold a majority of the preferred shares. This means, for example, that the new investor shall not decide in the director appointed by the preferred shares. This is not something a new potential investor can agree to.

SAFE and the like may be efficient tools for an investment in a startup, but only in the suitable circumstances. Those are limited to pre-seed investments from friend, family etc. Even under such circumstances, it is important to review the legal and commercial terms of the SAFE and ensure they suit the specific case.


Hebrew version –