Understanding SAFE Agreements
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Understanding SAFE Agreements
A SAFE (Simple Agreement for Future Equity) is the investment instrument we use for early-stage funding.
What is a SAFE?
A SAFE is not debt or equity — it's an agreement to receive equity in the future when a "triggering event" occurs (typically a priced funding round).
Key Terms
Valuation Cap
The maximum valuation at which your SAFE converts to equity. If the company raises at a higher valuation, you convert at the cap — giving you more shares.
Discount
A percentage reduction from the price paid by new investors. Typically 15-25%.
Pro-Rata Rights
The right to maintain your ownership percentage in future rounds by investing more.
MFN (Most Favored Nation)
If we issue SAFEs with better terms later, your SAFE automatically gets upgraded.
How Conversion Works
Example:
- You invest $50K on a $10M cap SAFE
- Series A raises at $20M valuation
- You convert at $10M (your cap), getting 2x the shares of Series A investors
Why We Use SAFEs
- Speed: No lengthy negotiations
- Simplicity: Standard documents
- Flexibility: No monthly payments or interest
- Alignment: We succeed together
Risks to Consider
- SAFEs are high-risk, illiquid investments
- Conversion depends on future fundraising
- You may wait years for liquidity
- Total loss is possible
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