A SAFE, or Simple Agreement for Future Equity, is a financial instrument used in early-stage investing. It is a type of convertible security that allows startups to raise funds quickly without having to determine a valuation upfront. In a SAFE, an investor provides funding to a company in exchange for the right to receive equity in the company at a future date, typically upon the occurrence of a specified triggering event, such as a future equity financing round or an acquisition.
The terms of the SAFE can be customized, but typically include a valuation cap, which is the maximum valuation at which the investor can convert their investment into equity, and a discount rate, which provides the investor with a discount on the future valuation when converting their investment. SAFEs are often used in seed rounds and are popular in the startup community due to their simplicity and flexibility.
