A SAFE transaction is an exchange of cash (from the investor) for an agreement that may result in ownership interest in the future. While not a debt instrument, the SAFE agreement like a convertible note provides the ability to obtain cash now for the potential to have an ownership interest in the future. Key things to know about SAFE:
- not debt,
- conversion triggered by an event,
- no interest accrual,
- demonstrates investor intent,
- single-document agreement without limited terms to negotiate,
- minimizes legal and other fees (saves time and money), and
- can have an investment cap.
There are several forms of SAFE Agreements:
- Valuation Cap, no Discount
- Discount, no Valuation Cap
- Valuation Cap and Discount
- MFN, no Valuation Cap , no Discount.
MFN provides the right to renegotiate the terms of the SAFE if a subsequent round of convertible securities is issued. If the new round has more favorable terms, then the investor has the right to amend his/her agreement to the more favorable terms.
Valuation Caps place a limit on the valuation that is used in a conversion calculation.