Documents and FAQ
Document Templates and FAQ
What is a SAFE? How do you handle my private data?
Find all of your answers here.
Expanded SAFE Note Details
What is a Valuation Cap Only SAFE?
The valuation cap in the SAFE is stated in terms of a post-money valuation. A post-money valuation and a pre-money valuation are just two different ways of framing the same valuation of the company, but at different points in time. A pre-money valuation is the valuation of the company immediately before the company receives the investment in the financing in question. A post-money valuation is just the valuation immediately after the investment is made. For example, if a company is raising $2 million at a $10 million pre-money valuation, generally that’s the same as saying that it is raising $2 million at a $12 million post-money valuation.
The Valuation Cap Only SAFE has a negotiated valuation cap. Meaning that any money raised on that SAFE will be converted into equity at a Conversion or Liquidity Event. This version of the SAFE is the easiest in terms of helping both founders and investors understand what percentage of equity will be allocated during a conversion event.
What is a Valuation Cap and Discount SAFE?
• This is a SAFE with a negotiated Post-Money Valuation Cap and a Discount Rate. The “Discount Rate” applies to the price per share of the Standard Preferred Stock sold in the Equity Financing and is equal to 100 minus the discount percent (e.g., a 20% discount off the price per share of the Standard Preferred Stock equals a Discount Rate of 80%).
• Either the Post-Money Valuation Cap or the Discount Rate applies when converting this SAFE into shares of SAFE Preferred Stock in an Equity Financing, depending on which calculation is most advantageous to the investor.
• The treatment of this safe in a Liquidity Event is the same as a Standard SAFE.
What is a Discount, No Valuation Cap SAFE?
• This is a SAFE with a negotiated Discount Rate that applies when converting this safe into shares of SAFE Preferred Stock in an Equity Financing.
• In a Liquidity Event, the investor is entitled to receive a portion of the proceeds equal to the greater of (1) a return of its Purchase Amount or (2) the as-converted proceeds it is entitled to in connection with a Liquidity Event (here, the proceeds it would be entitled to had its Purchase Amount been converted into common stock at a price per share equal to the fair market value of such stock multiplied by the Discount Rate).
What is a MFN [Most Favored Nations] SAFE?
• A MFN SAFE is a SAFE with no Post-Money Valuation Cap and no Discount Rate. If the company subsequently issues SAFEs with provisions that are advantageous to the investors holding this SAFE (such as a Valuation Cap and/or a Discount Rate), the investor may choose to amend its SAFE to reflect the terms of the later-issued SAFEs. The amendment term is the so-called “MFN Provision.” Note that, unless the later SAFEs also include an MFN, the MFN of the SAFE is amended away once the SAFE holder decides the MFN is triggered. In other words, the MFN provision typically provides only one opportunity to amend the SAFE, not multiple opportunities as the company continues to issue additional SAFEs. Moreover, it is important to be aware that the MFN provision does not permit the “cherry-picking” of terms. If a SAFE holder elects to convert its MFN SAFE to reflect the terms of subsequently-issued SAFEs, the amended SAFE will be identical to the later SAFE (other than the Purchase Amount).
• If there is an Equity Financing before this SAFE is amended pursuant to the MFN Provision, the investor receives the same shares of preferred stock as the new money investors in the Equity Financing, at the same price.
• If there is a Liquidity Event before this SAFE is amended by the MFN Provision, the investor is entitled to receive a portion of the proceeds equal to the greater of (1) a return of its Purchase Amount or (2) the as converted proceeds it is entitled to in connection with a Liquidity Event (here, the proceeds it would be entitled to had its Purchase Amount been converted into common stock at a price per share equal to the fair market value of the common stock).
What is a SAFE Note?
SAFE stands for Simple Agreement for Future Equity. The notes themselves are fundraising documents created by YCombinator in late 2013. The document has been used as a standard fundraising document by nearly all YC funded startups and has become a standard document for founders who are fundraising their earliest rounds. There are two versions of the SAFE, the pre-money and the post-money. Sign and Wire uses the post-money SAFE which is the latest revision to the standard YC notes. You can learn more about SAFE notes and YCombinator here.
Does a SAFE convert at a round of equity financing?
Yes, when the company decides to sell shares of preferred stock in a priced round (an “Equity Financing”), the outstanding SAFEs will convert into shares of preferred stock. There is no threshold amount of money in the post money safe that the company must raise to trigger the conversion.
Does a SAFE holder have a choice about converting a SAFE in an Equity Financing?
No, the conversion of a SAFE in an Equity Financing is automatic and the SAFE then terminates. A SAFE is intended to turn SAFE holders into stockholders.
What happens to a SAFE if a company is acquired or merges with another company?
A merger or acquisition is a “Change of Control,” which is a Liquidity Event in the SAFE. In a Liquidity Event, a SAFE holder is entitled to receive a portion of the proceeds equal to the greater of (1) a return of its Purchase Amount and (2) the as-converted proceeds it is entitled to in connection with a Liquidity Event (i.e., the proceeds it would be entitled to had its Purchase Amount been converted into common stock at the Post-Money Valuation Cap). In a Liquidity Event, the SAFE is junior to creditors and outstanding indebtedness (including outstanding convertible notes) and has the same priority as standard non-participating Preferred Stock.
What happens to a SAFE if the company goes public?
An Initial Public Offering is also a Liquidity Event under the SAFE, so the treatment of the SAFE in an Initial Public Offering is the same as in a Change of Control.
What happens to a SAFE if a company shuts down and goes out of business?
If the company shuts down and goes out of business (a “Dissolution Event”), the SAFE holder is entitled to receive its Purchase Amount back. In a Dissolution Event, the SAFE is junior to creditors and outstanding indebtedness(including outstanding convertible notes) and has the same priority as standard non-participating Preferred Stock.
What is the priority of the SAFE with respect to the company’s other securities in a Liquidity Event or Dissolution Event?
The SAFE functions like standard non-participating preferred stock in a Liquidity Event or Dissolution Event. That means that it ranks junior to payment of outstanding indebtedness (including outstanding convertible notes), on par with payments to other SAFE holders and preferred stockholders, and senior to payments to common stockholders.
What is the priority of the SAFE with respect to the company’s other securities in a Liquidity Event or Dissolution Event?
It can take up to 6 months to have the payments start showing up on your credit report. This timeline is dependent on the individual credit agencies. We report payments every week.
Does a SAFE ever expire?
A SAFE has no maturity date. A SAFE is designed to expire and terminate only when a SAFE holder has received stock, cash or other proceeds, in an Equity Financing, Liquidity Event or Dissolution Event – whichever occurs first. In theory, a SAFE could remain outstanding for a long time without the need to “extend” any dates or time periods. SAFEs are only active once the funds are transfered and received by the company.
What if the pre-money valuation of the company in the Equity Financing is higher than the SAFE’s Post Money Valuation Cap?
The SAFE holder’s ownership will be the greater of (1) what’s implied by the Post-Money Valuation Cap, or (2)what could be purchased for the Purchase Amount (i.e., the original amount invested under the SAFE) at the price per share paid by the new money investors in the priced round. In most situations where the pre-money valuation of the company in the Equity Financing is higher than the Post-Money Valuation Cap, the Post-Money Valuation Cap will apply. In that case, the SAFE holder will be issued Safe Preferred Stock, which has a liquidation preference equal to the Purchase Amount. This feature means that the liquidation preference for SAFE holders does not exceed the original purchase amount of the safe(a 1x preference). However, in certain situations where the Post-Money Valuation Cap and the pre-money valuation of the Equity Financing are close, the safe holder will actually receive more shares when using the price per share paid by the new money investors. In these situations, the SAFE holder will receive shares of the Standard Preferred Stock(described in further detail below) at the same price per share paid by the new money investors. To be clear, the possibility that the SAFE holder will receive more equity if the Equity Financing valuation does not sufficiently exceed the safe’s valuation cap is not something that changed in the new SAFE. The original SAFE also operated this way. If the pre-money valuation of the Equity Financing was close to the sum of the pre-money valuation cap in the original safe and the amount raised under the original SAFE, investors under the original SAFE also received more equity. In either regime, valuation caps are just that -- caps, rather than final valuations.
What if the pre-money valuation of the company in the Equity Financing is lower than the SAFE’s Post-Money Valuation Cap?
As noted above, the SAFE provides that the SAFE holder will get the benefit of applying the Post-Money Valuation Cap or receive shares of Standard Preferred Stock at the same price per share paid by the new money investors, whichever results in a greater number of shares. When the pre-money valuation of the company in the Equity Financing is lower than the Post-Money Valuation Cap, the SAFE holder will always receive a greater number of shares by using the price per share paid by the new money investors, and the Post-Money Valuation Cap will not apply.
What corporate formalities need to be observed when issuing SAFES?
The company’s board of directors must formally consent to the issuance of the SAFEs at a meeting or in a written consent before the company issues any SAFEs.
If there are existing shares of preferred stock outstanding, the company will also need to either (1) amend the company’s certificate of incorporation to clarify that the safes are on par with the existing preferred stock in terms of liquidation priority or (2) enter into a separate agreement with all of its existing preferred stockholders acknowledging the same. Without an amendment to the company’s certificate of incorporation or an explicit agreement with all preferred stockholders, the liquidation priority provisions of the safe may not work as intended.
Can a SAFE have a discount, or a “Most Favored Nation” (MFN) provision?
Yes, there are many types of SAFEs that can have valuation caps, discounts and/or MFN provisions.
Why do the SAFE templates that Sign and Wire uses contain language that they are one of the forms available at https://ycombinator.com/documents? What is the purpose of this statement?
The team at Sign and Wire believes that the YC Standard SAFE template is one of the most generally acceptable fundraising documents available today. We have retained the document as presented in their original form to engender trust between founders and their investors.
As YC has described in their own materials, "The SAFE is, and always has been, “open sourced” for founders and investors to use as they see fit. As expected, some users modified the online templates to change, delete or add various provisions, sometimes without notifying the counterparty of such modifications. This practice forced companies and investors alike to waste hours of time and effort doing line-by-line comparisons of the modified safes against the online template in order to identify the changes (or to confirm that no changes were made). We think it’s important for parties to be very sure about what they are signing. The statement was added to the standard template to ensure there are no surprises."
My company has outstanding convertible notes. Can I switch to fundraising on post-money SAFEs?
It’s generally not advisable to issue both convertible notes and SAFEs since they are treated differently in a Liquidation Event or Dissolution Event (outstanding convertible notes are treated as indebtedness and therefore have priority over any outstanding SAFEs). If a company has already issued many convertible notes, founders should probably continue issuing convertible notes for simplicity. If a company has only issued a few convertible notes, then it may be possible to work with the existing investors (with approval from the company’s board of directors) to convert the outstanding convertible notes into post-money SAFEs.
Can the SAFE be amended?
Yes. The SAFE can be amended with the written consent of the company and the investor, or with the written consent of the company and a majority-in-interest of all then-outstanding SAFEs with the same terms. The ability to amend the SAFE with the consent of a majority-in-interest allows the company and its investors to work together to sensibly amend the SAFE if the need arises. An investor’s Purchase Amount can never be amended without that investor’s separate consent.
Is the SAFE subject to transfer restrictions?
Yes, the SAFE is subject to a transfer restriction in Section 5(d), which provides that it may not be transferred without the company’s consent, unless it is being transferred to an affiliate. In practical terms, this means the SAFE holder cannot resell the SAFE to a different investor without the company’s approval.
What is the characterization of the SAFE for tax purposes?
We cannot give tax advice, so the only definitive thing we can say is that you should consult with your tax advisor if this question is material to your usage of the SAFE. YC has indicated that they have always intended and believed the SAFE to be an equity security.
How do you transfer money to the company I am investing in?
Sign and Wire partners with Stripe to originate an ACH Debit from your account directly to the Company that you have invested in. We do not take custody of the funds. In order to authorize the transfer investors are asked to auth their account through Plaid.
Does Sign and Wire access private financial information as part of the investment process?
Sign and Wire uses trusted third party services like Plaid and Stripe to authorize transactions. We DO NOT request, access, receive nor store any sensitive financial information from investors as part of these activities.
Can anyone use this service?
Sign and Wire is designed to let the founders of companies raise capital from accredited investors. We are not a law-firm and we do not provide financial advice. Please consult a legal advisor to understand the implications of raising capital and investing in companies.