The Safe (Simple Agreement for Future Equity) is a widely used instrument for early-stage fundraising introduced by Y Combinator in 2013. It has become the main tool for startups, both within and outside of Y Combinator, to raise funds in the early stages. Initially, the “pre-money” safe was designed for smaller fundraising amounts before a priced round of financing. However, as startup fundraising evolved, larger seed rounds became common, leading to the introduction of the “post-money” safe in 2018.
The post-money safe measures ownership after all the safe money is accounted for but before the new money from the priced round converts and dilutes the safes. This feature allows founders and investors to precisely calculate the ownership sold during fundraising. It provides transparency and clarity regarding the amount of dilution for founders and the ownership purchased by investors.
The safe offers two crucial features for startups:
High-resolution fundraising: Startups can close deals with investors as soon as both parties are ready to sign and the investor is prepared to provide the funds. This flexibility eliminates the need for simultaneous closing with all investors, making fundraising easier.
Cost and time efficiency: Safes are flexible, one-document securities that save startups and investors money on legal fees. Unlike traditional financing options, safes require negotiation only on the valuation cap. They have no expiration or maturity date, eliminating the need for complex extensions or revisions.
The Safe User Guide, primarily geared towards US companies, provides detailed explanations of the safe conversion process, sample calculations, information about the pro rata side letter, and best practices.
While the safe may not suit every financing situation, it aims to strike a balance between simplicity and comprehensiveness, addressing the most common issues for both startups and investors. Y Combinator encourages parties to consult their lawyers, although they believe the safe can be used without modifications in most situations. The safe’s design is based on Y Combinator’s extensive experience working with hundreds of companies and incorporating feedback from founders, investors, lawyers, and accountants.
It’s important to note that Y Combinator does not assume responsibility for the consequences of using any version of the safe or any other document found on their website. Before using these forms, it is advisable to consult a lawyer licensed in the relevant country where the company is formed.