SAFE

What it means

SAFE, a simple agreement for future equity, is an investment instrument introduced in 2013 by the US accelerator Y Combinator. An investor gives a startup money today and in return gets the right to equity in the future, usually in the next priced funding round. Until then the investor is not a shareholder and has no right to interest or repayment.

On conversion the investor receives shares at a price more favourable than new investors pay. Usually there is a valuation cap, the maximum pre-money valuation used to calculate the stake, or a discount to the new round price, or both. This rewards the investor for taking the risk early.

A SAFE is not a loan, so it has no maturity or interest, nor is it an immediate contribution to share capital. It is a contractual promise of future equity. This distinguishes it from a convertible loan, which is debt and must be repaid if conversion does not happen.

How it works in practice

The main advantages of a SAFE are simplicity and speed. The parties need not agree a valuation straight away, which is hard for a very young startup, and the commercial register entries do not change. This saves time and legal costs at an early stage when business angels invest smaller sums.

In Slovakia a US-style SAFE cannot be copied word for word, because Slovak law has no simple mechanism for issuing an interest in an s. r. o. to a future investor without the other shareholders. A similar aim is therefore achieved with a convertible loan, an agreement to transfer an interest in future, or a capital increase with a shareholders' agreement, or in a simple joint-stock company.

Before signing, model how the SAFE will affect the cap table after conversion. Several SAFEs with different valuation caps can dilute the founders heavily on conversion. We recommend preparing an ownership table for different scenarios of the next round so the founders know what stake they will keep.

What to watch out for

Since a SAFE has no maturity, the investor has no certainty that conversion will ever happen. If the startup never raises another round or goes under, the investor may lose everything. The agreement should therefore cover situations such as a sale or liquidation before conversion, stating whether the investor gets its money back or a share of the proceeds.

The accounting and tax treatment of SAFEs is not clearly settled in Slovakia, as it is a foreign instrument. On receiving the money, assess whether it is a liability, an advance on a contribution or some other relationship, and account accordingly. We recommend consulting a tax adviser and a lawyer before using it.