Start-up capital raising using a SAFE note

Start-up capital raising using a SAFE note

A common issue for most start-up businesses is that they are cash hungry. Securing investors in the early days can be complicated and legalistic if traditional methods, such as loans or convertible notes, are used. A Simple Agreement for Future Equity (SAFE) is relatively new in Australia and was developed in the US as a simple form of fundraising in the early stages of a start-up. We have summarised the key features of SAFEs below.

Key features

• Under a SAFE, an investor invests in a start-up in exchange for a contractual right to shares in the future upon an agreed trigger event, usually an equity fundraising round.
• The investment is not a debt instrument and does not attract interest.
• There is no repayment or maturity date.
• It is a relatively simple agreement, so the time, expense and complexity of implementation is reduced.
• As an incentive for an investor to enter into a SAFE, it is common for valuation caps and discount rates on conversion to be agreed.

Benefits of SAFEs

• A SAFE does not create a debt or interest liability for the company.
• A SAFE does not have a repayment or maturity date, so there is no pressure on the start-up to refinance or source further funds to repay the investor.
• It is simple to understand and negotiate, and it is flexible.

Cons of SAFEs

• The investor is not a creditor of the company, so it would not participate in any liquidation dividend.
• There is no guarantee or security of equity or return for the investor.
• It is not a revenue stream for an investor, more of a punt.

Things to consider when negotiating a SAFE

• How much is the investment?
• What is the trigger for conversion?
• Is there going to be a discount applied upon conversion?
• What will the founder’s dilution be?
• Is there a valuation cap?
• Draft a Shareholders Agreement now, that is appropriate for the investor to accede to (in the event that shares are issued under the SAFE in the future)