SAFE (simple agreement for future equity)

What it is and when it is used

A SAFE (simple agreement for future equity) is a short investment contract for early-stage companies. The Investor pays a purchase amount now, and in exchange receives the right to shares at a later date, usually when the company raises a priced round. The SAFE is not a loan: it carries no interest, has no maturity date and is not repaid in the ordinary course.

It is used for pre-seed and seed fundraising, for angel and early venture investments, and for bridge financing between priced rounds. Its main advantages are speed and simplicity. The parties do not have to agree a valuation for the company today; instead, the SAFE sets the terms on which the money will convert later. Investors can close one at a time, on the same or different terms, without waiting for a full round.

Until conversion, the Investor is neither a creditor nor a shareholder. The SAFE gives no voting rights, no dividends and no rights on liquidation except as the SAFE itself provides.

Who signs it and in which role

• The Company, the start-up that receives the purchase amount and issues the SAFE.
• The Investor, who pays the purchase amount and will receive the shares on conversion.

Key clauses

The skill negotiates 10 clauses. Seven are required; the most favoured nation, pro rata and information clauses are optional.

Valuation cap

The cap is the highest company valuation at which the SAFE converts, and the term the skill describes as the most negotiated. You enter the cap amount. The options are a post-money cap, where ownership equals the purchase amount divided by the cap; a pre-money cap, where ownership floats until the priced round; or no cap at all, with conversion at the next round's price and protection coming only from a most favoured nation clause.

Discount rate

A discount lowers the price the SAFE holder pays compared with the new investors in the round. The options are no discount (the cap alone sets the price), 15, 20 or 25 percent. When a cap and a discount both apply, the Investor converts at whichever gives the lower price.

Most favoured nation (MFN)

An MFN clause lets the Investor adopt better terms the Company later gives to another SAFE holder. The options are a full MFN covering any term, an MFN limited to the valuation cap, or no MFN.

Pro rata rights

These rights let the Investor invest more in the round in which the SAFE converts, to keep its percentage. Following current market practice, they are granted in a separate side letter rather than in the SAFE. The options are pro rata rights for the Investor, pro rata rights only for investors above a minimum investment, or none.

Equity financing threshold

This is the minimum size of a priced round that triggers automatic conversion, so that a small bridge round does not convert the SAFE by accident. The options are 1 million (the standard threshold), 500,000 or 2 million.

Dissolution event treatment

This clause decides what the Investor receives if the company winds up before converting. The options are return of the purchase amount, paid after creditors and holders of senior preferred shares but before common shareholders; a 1x liquidation preference ranking equally with the seed or Series A preferred; or the purchase amount plus a share of the remaining proceeds as if the SAFE had converted.

Information rights

The options are no contractual information, annual financial statements, or quarterly financial and operating updates.

Transfer restrictions

The SAFE can be transferable only with the Company's prior written consent (with exceptions for affiliates and estate planning), transferable to accredited investors on prior notice, or freely transferable on notice.

Investor representations

The Investor confirms its status and its ability to bear the risk. The options are standard accredited investor representations, enhanced representations (including source of funds and specific risk acknowledgements), or representations for institutional investors and qualified purchasers.

Governing law and disputes

The options are Delaware law and courts, California law and courts, English law and the London courts, or Delaware law with JAMS arbitration. Dealroom only offers the routes that fit the chosen jurisdiction.

Standard terms also cover the purchase and issuance of the SAFE, conversion on an equity financing, the Investor's choice between cash and shares on a sale or IPO, the Company's representations, a statement that the SAFE is intended to be treated as a non-compensatory option for US federal income tax purposes, and the absence of shareholder rights before conversion.

SAFE or convertible note

Both instruments postpone the valuation to the next round and reward early investors with a cap, a discount or both. The difference is legal form. A convertible note is debt: it accrues interest, has a maturity date at which the investor may ask for repayment, and must respect usury rules. A SAFE has none of these features, so the Company never faces a repayment demand, and the Investor has no creditor's claim if no round happens. Notes usually use a pre-money cap; the SAFE in Dealroom is built around the post-money cap.

What the two sides usually negotiate

The Company wants a high cap, little dilution and light obligations; the Investor wants a good conversion price, protection against better terms for later investors, and visibility over the business. The positions that sit closest to the centre in the skill are:

• Valuation cap: a post-money cap.
• Discount: 15 percent, which leans slightly towards the Investor; no discount leans towards the Company.
• MFN: limited to the valuation cap.
• Pro rata: only for investors above a minimum investment.
• Threshold: 1 million.
• Dissolution: return of the purchase amount.
• Information: annual financial statements.
• Transfers: only with the Company's consent.
• Representations: standard accredited investor representations.

The most contested points sit at the extremes. An uncapped SAFE strongly favours the Company, while a 25 percent discount, participation on dissolution and free transferability strongly favour the Investor.

Jurisdictions and languages Dealroom supports for it

Dealroom offers the SAFE for California, England and Wales and Spain, drafted in English or Spanish.

• California: California law and the state and federal courts of San Francisco County, with a note that the conversion shares rely on the exemptions under the Securities Act of 1933 and may be subject to the California Corporate Securities Law of 1968.
• England and Wales: structured as an advance subscription agreement under English law. Conversion shares are allotted under the Companies Act 2006, subject to the section 561 pre-emption rules, and the Company confirms its authority to allot. The agreement carries the SEIS and EIS warning described above, and liability for fraud is preserved.
• Spain: governed by Spanish law, with the courts of the company's registered office. Because an S.L. has no authorised capital (article 297 LSC applies only to sociedades anónimas), each conversion is a capital increase approved by the general meeting (article 199.a LSC), executed in a public deed and registered (article 315 LSC). The members' pre-emption right under article 304 LSC cannot be waived in advance, so the Company undertakes to obtain a waiver at each increase or an exclusion under article 308 LSC; an increase by set-off of credits gives rise to no pre-emption right. Free transfer and participation on dissolution are not offered for Spain.

Common mistakes

• Not modelling dilution. Every SAFE compounds with the others; a post-money cap makes each investor's percentage clear, but the founders bear the combined dilution.
• Granting side letters to everyone. Pro rata rights for very small cheques complicate the next round.
• Using a standard SAFE for SEIS or EIS investors. Without a longstop of six months or less, the relief is lost.
• Assuming a Spanish S.L. can convert on its own. Each conversion needs a general meeting resolution, a deed and registration, and a plan for the members' pre-emption right.
• Setting the threshold too low. A small bridge round could then convert the SAFE at an unintended price.

# 1. Read the clauses, options and the facts it needs
curl https://dealroom.todo.law/api/v1/agent/templates/SAFE \
  -H "Authorization: Bearer drk_YOUR_KEY"

# 2. Create the contract (clauses you leave out take the default option)
curl -X POST https://dealroom.todo.law/api/v1/agent/deals \
  -H "Authorization: Bearer drk_YOUR_KEY" \
  -H "Content-Type: application/json" \
  -H "Idempotency-Key: $(uuidgen)" \
  -d '{
    "schema": "dealroom.solo-intake/1",
    "contractType": "SAFE",
    "governingLaw": "ENGLAND_WALES",
    "language": "en",
    "dealName": "Example SAFE",
    "selectionPolicy": "defaults"
  }'