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Who should use a SAFE? How does it work?
Created by Y Combinator, a SAFE (Simple Agreement for Future Equity) grants an investor the right to purchase equity at a future date.
A SAFE is best used for startups in Silicon Valley that intend to raise venture capital eventually, and have a chance to be acquired or file for an IPO. It should not be used by lifestyle companies that do not intend to raise follow-on financing.
Unlike a convertible note, a SAFE is not a loan. As such, it does not accrue interest or have a maturity date. This makes things simpler and negates much of the need to amend the agreement in the future. For example, it helps startups not waste time extending maturity dates or revising interest rates, if a Series A financing takes longer than you first expect. It also better aligns with the intention of most equity investors, who never intended to be lenders.
Wefunder offers the Y Combinator SAFEs as part of our default contracts you can use out of the box, modified only to allow unaccredited investors. We also created versions for an LLC.
The following terms are customizable:
- Valuation Cap. The Valuation Cap is the most important term. It entitles investors to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent financing. Typical Valuation Caps for early-stage startups currently range from $4 million to $20 million.
- Discount Rate. The default is 0%. This term is now rarely used and not recommended unless a major investor asks for it. It gives investors a discount on the price of stock, when the pre-money valuation is less than your valuation cap. Typical discounts range from 0% to 10%.
- Governing Law. We default to Delaware, but you may change to any state.
- Most Favored Nation (MFN) provision. The default is false. However, if you add this provision, investors will match the terms of any better terms you may offer other non-Wefunder investors.