Jay Jung explores funding needs for startups and shares a tool to help navigate the process successfully.
What’s the secret to meeting the complex funding needs of a startup? Truthfully, it’s flexibility. One way to find that flexibility is by using a simple agreement for future equity, or SAFE, to bridge the gap.
Let’s take a closer look at what this tool is–and how it works.
What is a SAFE?
A Simple Agreement for Future Equity, or SAFE, is a financial instrument for startup funding. It’s an alternative to traditional convertible notes that provides the investor a right to obtain equity shares at a future date.
SAFEs do not accrue interest or come with a maturity date. Instead, the terms of the agreement define a trigger event. This means that SAFEs are not debt; they’re also not exactly equity (at least not until the investment converts).
How SAFEs Work
Startups have complex funding needs. In response to the unique challenges many startups face, the popular startup accelerator and early-stage venture capital firm YCombinator, created SAFEs to bring simplicity, efficiency, and alignment to startup funding.
Essentially, a SAFE is an investment agreement. A startup and an investor negotiate the terms of a simple agreement that includes:
Key points include:
- SAFEs vs. Traditional Convertible Notes
- Pre-Money vs. Post-Money SAFEs
- Post-Money SAFE Investments
Read the article, SAFEs 101: Startup Funding, on LinkedIn.