Simple Agreement For Future Equity (2023)

What Is A Simple Agreement For Future Equity (SAFE)?

A simple agreement for future equity or SAFE refers to a financing contract startups use to raise funds in their seed funding round. It gives investors the right to the company’s future equity like a warrant, but without determining a particular price per share when making the initial investment.

Simple Agreement For Future Equity (1)

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A SAFE can be crucial to a company’s growth as it does not accrue interest, unlike a loan, and is relatively straightforward to create and implement. However, SAFEs convert into equity only if a particular trigger event occurs, for example, an acquisition or a future financing round. One can find such events outlined in the agreement.

Table of contents
  • What Is A Simple Agreement For Future Equity (SAFE)?
    • Simple Agreement For Future Equity Explained
    • Sample
    • Examples
    • Tax Treatment
    • Simple Agreement For Future Equity vs Convertible Note
    • Frequently Asked Questions (FAQs)
    • Recommended Articles

Key Takeaways

  • The simple agreement for future equity definition referstofinancing contractsthat early-stage startups can utilize to raise funds from investors in their seed financing round.
  • SAFE notes allow investors to subscribe to the company’s shares if a trigger event occurs.
  • There are various key elements in a SAFE, for example, valuation-cap, discount, pro-rata rights, etc. But, again, individuals can look at a simple agreement for future equity samplesto clearly understand such aspects.
  • Typically, one can find the simple agreement for future equity discount ratesat the top of the contract.

Simple Agreement For Future Equity Explained

Thesimple agreement for future equity definition refers to a legal agreement between an investor and an early-stage startup that enables the former to invest in the latter immediately in exchange for equity shares they will receive later.

(Video) What is a SAFE Investment? | Explaining a Simple Agreement For Future Equity

The investor gets the shares only if a certain trigger event mentioned in the agreement occurs in the future. The SAFE term sheet defines the relationship between the investor and the startup. Moreover, it determines how the agreement will work.

Once both parties agree on all the terms, they sign the SAFE. Then, the investor transfers the sum to the startup. Then, the company can use the money according to the agreed-upon terms and conditions.

Individuals willing clearly understand the concept must know the characteristics of this agreement. So, some of the features are as follows:

  • Shadow Stock Issuance: The stock issued by startups to SAFE investorsis termed shadow stock. Although this stock intended to have the rights identical to new preferred stock, they differ in certain aspects, for example, liquidation preference and conversion price.
  • No Interest Rate: Since a SAFE is not a debt, it does not accrue any interest.
  • Deferred Valuation Clause: Thisdelays thecompany’s valuation until a future date.
  • No Description Of The Qualifying Equity Round: It is possible to convert a SAFE at any funding round when determining the business’s value is possible. The company does not need to raise any specific qualifying amount for SAFE’s conversion.


Individuals who wish to get a clearer idea of a SAFE can look at the simple agreement for future equity samplebelow.

Simple Agreement For Future Equity (2)

Source: SEC

Some of the elements of a SAFE are company representations, definitions, and event representations. Besides these, this investment contract comes with multiple crucial terms and parameters. Therefore, one must know about them in detail.

  • Discount: SAFE may come with a discount to attract early investors. A valuation discount is offered relative to the investors giving funds in the next financing round. Typically, a simple agreement for future equity discount ratesranges from 10% to 30%. One can find the discount at the top of a SAFE.
  • Pro-rata Rights: This right provides SAFE investors an extra right to participate in the succeeding funding round to maintain their ownership percentage.
  • Valuation Cap: This is the maximum imposed on the valuation at which a SAFE can convert into stock ownership. This enables SAFE investors to benefit from a better price per equity share than entities investing later.
  • Post-Money And Pre-Money:These valuation measurementsenablea company’s founders and investors to understand the business’s actual worth. Pre-money valuation refers to the valuation before a new investor gives funds. In contrast, post-money is the valuation, including the money raised in that funding round.


To understand the concept better, let us look at a few simple agreements for future equity examples.

(Video) How the Post-Money SAFE (Simple Agreement for Future Equity) works

Example #1

Suppose Panther Tees, a startup, raised seed funding worth $20,000 from Matt Smith, an angel investor, using a SAFE with a 50% discount. Two years later, Panther Tees closed its Series A round at a $4 million pre-money valuation at $4 per share.

Although the company’s valuation was $4 million, Matt Smith could convert the SAFE into stock ownership at a discount of 50% on the price of each share. Therefore, he acquired the company’s shares at $2 each. This means that he converted his SAFE into 10,000 shares ( $20,000/2) which would have cost him $100,000 had he not signed a SAFE.

Example #2

Lion Copper and Gold, a Canada-based mining company, announcedthat it completed funding for Blue Copper Resources Corp, a subsidiary based in the U.S. The former received $2,000,000 by selling shares of common stock via private placement and an additional $867,500 per the conversion of SAFE notes. Lion Copper and Gold will utilize the proceeds for the Blue Copper prospect’s further exploration and to fulfill the targets concerning other green explorations.

Tax Treatment

The tax treatment of a SAFE is unclear owing to the unavailability of Internal Revenue Service Or IRS guidance. The typical method used to tax new derivatives, for example, SAFEs, involves assigning them to multiple transaction categories for which rules exist. That said, one must note that SAFES do not fit accurately into a particular category. Despite being similar to convertible notes, SAFEs are not debt as they do not have interest payments, repayment obligations, maturity dates, etc.

In addition, SAFEs do not have the rights conventionally associated with equity, for example, the right to vote regarding corporate matters and dividend rights. However, their tax treatment can be similar to that of equity as they convert into equity at a later date. The remaining category for SAFE is precisely variable prepaid forward contracts.

After all, both are similar from an economic standpoint. Although a SAFE does not mention the total number of shares investors can obtain and the purchase date, a formula is available to determine such items.

One must not disqualify a SAFE from being treated as a prepaid forward contract. Assuming the tax treatment of SAFEs is the same as a variable prepaid forward contract, the acquisition of SAFEs and the amount received by issuers must not be taxable events. The subsequent share issuance to satisfy the FACE contract is also non-taxable.

(Video) Understanding SAFEs and Priced Equity Rounds by Kirsty Nathoo

That said, if physical settlement occurs, investors’ basis in the shares acquired equals the overall amount paid to obtain the SAFE. Investors’ holding period begins again. This is crucial as the holding period determines whether they are eligible for the gain exclusion under Section 1202.

Let us look at the pros and cons of SAFEs:

Pros & Cons

#1 – Pros

  • As noted above, a SAFE does not bear any interest, and with such an agreement, businesses will not have debt on their balance sheet.
  • There is no time pressure on businesses to convert a SAFE into equity.
  • Issuing SAFEs is a straightforward process. Moreover, such an investment contract is generally standardized.
  • SAFE investors can enjoy more beneficial rights than common stockholders.

#2 – Cons

  • Getting out of a SAFE contract can be challenging for investors. This is because entities can sell a SAFE after a year from the purchase date, and that too only if they find a buyer.
  • SAFE contracts’ standardization inhibits flexibility.
  • A SAFE is a high-risk investment as it will not convert into stock ownership until certain trigger events specified in the agreement occurs.

Simple Agreement For Future Equity vs Convertible Note

Let us look at some critical differences between SAFEs and convertible notes.

  • A SAFE is not a debt, unlike a convertible note.
  • SAFE contracts do not come with a maturity date and interest rate. On the contrary, convertible notes carry an interest rate and a maturity date.
  • Unlike a convertible note, a SAFE does not have a minimum limit for qualified financing.
  • Issuing SAFE notes is easier than convertible notes.

Frequently Asked Questions (FAQs)

Is a simple agreement for future equity a liability or equity?

Companies do not record SAFE notes as debt. Instead, venture capitalists expect businesses to present them in their balance sheet’s equity section. Hence, organizations must classify SAFE notes are equity, not debt.

(Video) Startup Financing 101: How SAFEs and Convertible Notes Work | Equity funding explained

Do simple agreement for future equity notes expire?

SAFEs are not debt instruments. Hence, they do not come with an expiry or maturity date. This is why investors might have to wait a long time to convert SAFE notes to equity, even if a business reports a profit.

What if a simple agreement for future equity note never converts?

If a SAFE never converts, the investor who gave funds to the startup using this legal contract can never obtain the company’s equity shares. Typically, the contract terms outline what happens if such a situation occurs. That said, in most cases, investors lose the funds they invested in the company using a SAFE.

4. Do investors like simple agreement for future equity notes?

Investors are cautious regarding SAFE notes as they are not debt instruments, and there remains a possibility that they will never convert into stock ownership.

(Video) How the pre-money SAFE (Simple Agreement for Equity) Works

Recommended Articles

This has been a guide to what is Simple Agreement For Future Equity. We explain its tax treatment, example, pros, sample, & comparison with convertible note. You can learn more aboutfrom the following articles –

  • Regulation Crowdfunding
  • Crowdfunding
  • Corporate Venture Capital


What is an example of Simple Agreement for Future Equity? ›

Suppose a SAFE is issued with a 20% discount. This means if the SAFE investor invested $40,000 in a startup whose price per share at the time of future investment comes out to be $10, he'll get the share at a 20% discounted price, which is $8. This means he'll get 5000 shares instead of 4000.

What is a Simple Agreement for Future Equity trigger? ›

A SAFE is an agreement to provide you a future equity stake based on the amount you invested if—and only if—a triggering event occurs, such as an additional round of financing or the sale of the company.

What is Simple Agreement for Future Equity SAFE price? ›

Note 12 - Simple Agreement for Future Equity

The SAFE Price is the price per share equal to the Valuation Cap divided by the Company's capitalization amount on a fully-diluted basis. The Discount Price is the price per share of the equity instrument sold in an Equity Financing multiplied by the Discount Rate.

What are examples of SAFE agreements? ›

SAFE agreements can include a discount. The discount is used if the SAFE investor money converts in future financing rounds and the valuation was at or below the valuation cap. For example, a 20% discount rate means an investors money would buy shares at a $8m valuation if the priced round was $10m (20% discount).

What are 5 examples of equity? ›

What are Equity Accounts? There are several types of equity accounts that combine to make up total shareholders' equity. These accounts include common stock, preferred stock, contributed surplus, additional paid-in capital, retained earnings, other comprehensive earnings, and treasury stock.

What are 2 examples of equity? ›

Two common types of equity include stockholders' and owner's equity.

How does an equity agreement work? ›

Equity agreements allow entrepreneurs to secure funding for their start-up by giving up a portion of ownership of their company to investors. In short, these arrangements typically involve investors providing capital in exchange for shares of stock which they will hold and potentially sell in the future for a profit.

How do you write a simple contract agreement? ›

Write the contract in six steps
  1. Start with a contract template. ...
  2. Open with the basic information. ...
  3. Describe in detail what you have agreed to. ...
  4. Include a description of how the contract will be ended. ...
  5. Write into the contract which laws apply and how disputes will be resolved. ...
  6. Include space for signatures.

How does an equity agreement at work? ›

An equity agreement is a legal document governing the terms and conditions of equity compensation, such as stock options, restricted stock, and phantom stock. Equity Agreements specify the time period in which equity compensation is earned or paid (the vesting period).

What is the downside of Simple Agreement for Future Equity? ›

Cons: SAFE agreements are high risk. These investments don't convert to equity unless a liquidity event occurs. The standardization of SAFE agreements inhibits flexibility.

What is the safest investment right now? ›

Overview: Best low-risk investments in 2023
  • Short-term certificates of deposit. ...
  • Money market funds. ...
  • Treasury bills, notes, bonds and TIPS. ...
  • Corporate bonds. ...
  • Dividend-paying stocks. ...
  • Preferred stocks. ...
  • Money market accounts. ...
  • Fixed annuities.
Mar 1, 2023

Do SAFE agreements expire? ›

Because a safe has no expiration or maturity date, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like.

What are the 3 types of agreement? ›

The three most common contract types include:
  • Fixed-price contracts.
  • Cost-plus contracts.
  • Time and materials contracts.
Jan 29, 2021

What should be included in an agreement? ›

A contract is an agreement between parties, creating mutual obligations that are enforceable by law. The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.

What is equity with simple example? ›

Equity can be calculated by subtracting liabilities from assets and can be applied to a single asset, such as real estate property, or to a business. For example, if someone owns a house worth $400,000 and owes $300,000 on the mortgage, that means the owner has $100,000 in equity.

What is equity in simple words? ›

The term “equity” refers to fairness and justice and is distinguished from equality: Whereas equality means providing the same to all, equity means recognizing that we do not all start from the same place and must acknowledge and make adjustments to imbalances.

What are 10 examples of equity? ›

10 equity account types
  • Common stock. ...
  • Preferred stock. ...
  • Retained earnings. ...
  • Contributed surplus. ...
  • Additional paid-in capital. ...
  • Treasury stock. ...
  • Dividends. ...
  • Other comprehensive income (OCI)
Jun 24, 2022

What is an example of equity in the workplace? ›

One example of equity in the workplace is building DEIB programs that are inclusive of health conditions or disabilities. For example, employees that are neurodivergent require supportive work conditions that help them thrive.

What is the benefit of equity? ›

The main benefit from an equity investment is the possibility to increase the value of the principal amount invested. This comes in the form of capital gains and dividends. An equity fund offers investors a diversified investment option typically for a minimum initial investment amount.

What are examples of equity agreements? ›

Example of using Equity Agreement

For example, the parents may decide to enter into an agreement in which they pay the down payment and sign a mortgage. This means they will be compelled to pay half of the mortgage until the loan is paid in full.

Is simple agreement for future equity a debt? ›

SAFEs may have similar conversion features but lack the debt hallmarks of convertible notes. In particular, a SAFE has no: Maturity date. Until a conversion event occurs, SAFEs remain outstanding indefinitely.

Do I have to pay back my equity? ›

When you get a home equity loan, your lender will pay out a single lump sum. Once you've received your loan, you start repaying it right away at a fixed interest rate. That means you'll pay a set amount every month for the term of the loan, whether it's five years or 30 years.

What is an example of a very simple contract? ›

For example, if a children's party entertainer and a parent have a written simple contract stating specific activities that the performer will provide on a certain date, but the event is canceled by one party, the other may choose to sue for damages.

What are the 3 elements of a simple contract? ›

Elements of a Contract
  • Offer - One of the parties made a promise to do or refrain from doing some specified action in the future.
  • Consideration - Something of value was promised in exchange for the specified action or nonaction. ...
  • Acceptance - The offer was accepted unambiguously.

How do you start an agreement sentence? ›

The basic rule of sentence agreement is really quite simple: A subject must agree with its verb in number. (Number means amount.
Singular Subjects and Verbs
  1. A singular subject takes a singular verb. ...
  2. Plural subjects that function as a single unit take a singular verb. ...
  3. Titles are always singular.

How do you negotiate with equity offer? ›

What's The Best Way To Negotiate Equity?
  1. Know More About The Company. ...
  2. Review The Financial Possibilities of The Company. ...
  3. Check Out Companies Similar To Your Prospective Employer. ...
  4. Examine The Job Offer Thoroughly. ...
  5. Talk About Your Needs & The Needs of The Business.

How is the settlement of equity futures contract done? ›

On the expiry of the futures contracts, NSE Clearing marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash. The final settlement of the futures contracts is similar to the daily settlement process except for the method of computation of final settlement price.

How is equity paid out? ›

How is equity paid out? Companies may compensate employees with pure equity, meaning they only pay you with shares. This may be a risk, but it may create a large payout for you if the company is successful. Other companies pay some shares supplemented with additional compensation.

Why equity mutual funds are risky? ›

Mutual Fund Schemes are not guaranteed or assured return products. Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.

What are the dangers of using equity to invest in realty? ›

Risks of Using a Home Equity Loan to Invest in Real Estate
  • You could default on your loan and lose your home if you can't keep up with payments. ...
  • Your home's value could decrease and you could become underwater on your loans, meaning that you can't move or sell your home without paying money to your lenders.
Aug 31, 2022

Is equity financing risky? ›

Is Debt Financing or Equity Financing Riskier? It depends. Debt financing can be riskier if you are not profitable as there will be loan pressure from your lenders. However, equity financing can be risky if your investors expect you to turn a healthy profit, which they often do.

What investments should I avoid? ›

13 Toxic Investments You Should Avoid
  • Subprime Mortgages. ...
  • Annuities. ...
  • Penny Stocks. ...
  • High-Yield Bonds. ...
  • Private Placements. ...
  • Traditional Savings Accounts at Major Banks. ...
  • The Investment Your Neighbor Just Doubled His Money On. ...
  • The Lottery.
7 days ago

What do rich people invest in? ›

Millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios.

How can I double my money in 5 years? ›

List of 10 Best Investments in India to Double Your Money Guaranteed
  1. Mutual Funds. ...
  2. National Savings Certificates (NSC) ...
  3. Equity Market. ...
  4. Kisan Vikas Patra (KVP) ...
  5. Corporate Bonds. ...
  6. Gold Exchange Traded Funds (ETFs) ...
  7. Real Estate. ...
  8. Public Provident Fund (PPF)
Jan 20, 2023

Why do investors not like SAFE notes? ›

Issues To Consider As An Investor

SAFE notes offer none of the protections that convertible equity does. There is no liquidation preference, no guarantee you'll get your money back and no guaranteed timeframe for equity conversion.

What is the downside of a SAFE note? ›

Risks and drawbacks of using SAFE notes

That small amount of wiggle room leads to a significant problem: different valuation caps for separate investors. Many founders will set up different agreements with different caps for investors they want to attract, but that reduces your previous investor's investment.

What happens to SAFE note if startup fails? ›

What happens to a SAFE Note if the startup fails? If a startup that has issued SAFE (Simple Agreement for Future Equity) notes fails, the investors who provided funding through the SAFE will typically lose the money they invested.

What is a short form agreement? ›

The Short Form Agreement (SFA) is a two-page document acceptable for use on small to medium projects as risk and responsibility are reasonably shared between the parties.

What is a basic agreement? ›

A basic agreement is a written instrument of understanding, negotiated between an agency or contracting activity and a contractor, that (1) contains contract clauses applying to future contracts between the parties during its term and (2) contemplates separate future contracts that will incorporate by reference or ...

What is an example of contract and agreement? ›

Common examples of contracts are non-disclosure agreements, end-user license agreements (both despite being called “agreements”), employment contracts, and accepted purchase orders.

What is a valid agreement? ›

A valid contract is an agreement, which is binding and enforceable. In a valid contract, all the parties are legally bound to perform the contract. The Indian Contract Act, 1872 defines and lists the essentials of a valid contract through interpretation through various judgments of the Indian judiciary.

What are the two types of agreements? ›

Express and Implied Contracts

These are the kinds of contracts that most people think of when they think of contracts. Implied contracts, on the other hand, have terms that must be inferred by actions, facts, and circumstances that would indicate a mutual intent to form a contract.

What are the 5 basic types of contracts? ›

Federal government contracts are commonly divided into two main types, fixed-price and cost-reimbursement. Other contract types include incentive contracts, time-and-materials, labor-hour contracts, indefinite-delivery contracts, and letter contracts.

How do you write an agreement between two people? ›

Here are the steps to write a letter of agreement:
  1. Title the document. Add the title at the top of the document. ...
  2. List your personal information. ...
  3. Include the date. ...
  4. Add the recipient's personal information. ...
  5. Address the recipient. ...
  6. Write an introduction paragraph. ...
  7. Write your body. ...
  8. Conclude the letter.

How do you write a simple agreement? ›

Write the contract in six steps
  1. Start with a contract template. ...
  2. Open with the basic information. ...
  3. Describe in detail what you have agreed to. ...
  4. Include a description of how the contract will be ended. ...
  5. Write into the contract which laws apply and how disputes will be resolved. ...
  6. Include space for signatures.

What are some examples of equity financing? ›

Common equity finance products include angel investment, venture capital and private equity.

How do you write a simple investment contract? ›

How To Create a Simple Investor Agreement For A Small Business Investment
  1. Step 1: Outline the purpose of the investment. ...
  2. Step 2: Define the investment amount. ...
  3. Step 2: Agree on the basic structure of the investment. ...
  4. Step 3: Set a return on investment. ...
  5. Step 4: Define the rights and responsibilities of each party.

What is a good sentence for agreement? ›

Example Sentences

Any changes to the plan require the agreement of everyone involved. There is wide agreement on this issue. They have been unable to reach agreement about how to achieve reform. I thought we had an agreement.

What are 5 elements of a good agreement? ›

A contract involves two or more parties who are competent to enter into a legally binding agreement.
The 5 elements of a legally binding contract are made up of:
  • An offer.
  • Acceptance,
  • Consideration.
  • Mutuality of obligation.
  • Competency and capacity.

What are the risks of equity financing? ›

The main disadvantage to equity financing is that company owners must give up a portion of their ownership and dilute their control. If the company becomes profitable and successful in the future, a certain percentage of company profits must also be given to shareholders in the form of dividends.

What are the four types of equity financing? ›

Individual investors, venture capitalists, angel investors, and IPOs are all different forms of equity financing, each with its own characteristics and requirements.

What are the 7 types of equity funding? ›

Here are seven types of equity financing for start-up or growing companies.
  • 01 of 07. Initial Public Offering. ...
  • 02 of 07. Small Business Investment Companies. ...
  • 03 of 07. Angel Investors for Equity Financing. ...
  • 04 of 07. Mezzanine Financing. ...
  • 05 of 07. Venture Capital. ...
  • 06 of 07. Royalty Financing. ...
  • 07 of 07. Equity Crowdfunding.
Jun 16, 2020

Is a simple agreement for future equity an option? ›

A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.

How do you write a simple legally binding contract? ›

For a contract to be considered valid and enforceable, it must possess the following elements:
  1. Offer and acceptance. Legally binding contracts must include a party making an offer and another party accepting the terms of the offer. ...
  2. Consideration. ...
  3. Mutuality or intention. ...
  4. Legality. ...
  5. Capacity.
Jul 18, 2022

Can you write your own contract agreement? ›

Why You Need a Business Contract Lawyer. If you're asking whether you need a lawyer to draft a contract, legally, the answer is no. Anyone can draft a contract on their own and as long as the elements above are included and both parties are legally competent and consent to the agreement, it is generally lawful.


1. What is a Simple Agreement for Future Equity ("SAFE")?
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2. Simple Agreement for Future Equity, or SAFE
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3. Startup financing 101: What's a valuation cap? SAFEs and convertible notes explained
4. Convertible Note vs Post-Money SAFE (Simple Agreement for Future Equity) - Which is Best?
5. In a friends and family round, should you offer equity or SAFE note
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6. Y Combinator SAFE Agreement
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