![]() The startup can’t give shares to the investor yet, because the value of a share is based on the valuation of the company-and no valuation exists yet. In a pre-money SAFE, the investor gives a certain amount of money to a startup in exchange for shares received at a later date. Now that we’ve got the basic history out of the way, let’s dive into how pre-money SAFEs and post-money SAFEs actually work-and what implications they hold for founders and investors. This new post-money SAFE gives the investor more clarity on what percentage of the company they will own once their money is converted into shares. ![]() For now, suffice it to say that pre-money SAFEs come with a fair bit of uncertainty-and investors tend to not like uncertainty! In response to this, Y Combinator introduced the “post-money” SAFE in 2018. We’ll explain why that’s the case in a minute. Only after all SAFEs convert into shares during the next priced funding round will each SAFE investor know how their ownership percentage compares to that of other investors. In a pre-money SAFE, the investor doesn’t yet know what percentage of the company they actually own, relative to the founders and other SAFE investors. Y Combinator’s first SAFE was considered a “pre-money” SAFE. ![]() The tech startup accelerator Y Combinator launched the SAFE in 2013 as a response to startups looking for a faster, easier way to raise money in advance of a priced round of financing. Given their popularity, you might be surprised to learn that SAFEs are a relatively recent invention. But heads up: the pricing of shares into which the SAFE is converted may differ if the SAFE has a valuation cap, which puts a ceiling on how the shares are valued when calculating the conversion price. The number of shares the investor receives is typically based on the valuation of the company at that time. Under most SAFEs, the investor receives the shares in the next priced round of financing (usually a Series Seed or Series A round). Because a SAFE involves converting money into equity at a later date, SAFEs are often referred to as convertible securities. A SAFE gets around this issue by serving as an agreement that the investor will pay money now and receive shares of company stock later. How to choose the right type of SAFE for your startupĪ Simple Agreement for Future Equity (we’ll call it a SAFE from here on out) is an agreement that an early-stage startup makes with an investor-typically when raising money during a seed round.īecause the startup doesn’t yet have a formal valuation, it doesn’t have shares to issue to the investor.Knowing which type of SAFE makes sense for your startup can save you a lot in stress (and ownership dilution) during your next funding round. In this guide, we’ll walk you through the basics of SAFEs and introduce you to the two key types: pre-money SAFEs and post-money SAFEs. Of course, even things designed to be simple can feel complex and overwhelming at times, and SAFEs are no different. The lack of paperwork and hardcore lawyering involved makes this a potentially great deal for founder and investor alike. The invested money doesn’t come with an interest rate or a loan maturity date instead, it converts into shares when the next financing round happens. As its name implies, the transaction is refreshingly simple. It is called a Simple Agreement for Future Equity-or a SAFE, for short.Ī SAFE allows for an investor to give money to an early-stage startup in exchange for the right to future equity. What to do? Fortunately, there is a type of agreement specifically designed for these types of situations. And its founders don’t have the money to pay for the transaction costs associated with a legally complex fundraising agreement. For one, the startup has no shares of company stock to issue to investors. ![]() This startup has a lot of promise, but there are a few important things it doesn’t have. ![]() Pretend you’re a venture capital investor and you’re interested in investing some money in an early-stage tech startup. ![]()
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