SAFE Investments

The upside of raising money with SAFE in emerging markets that convertible notes do not have

Some months ago I participated in a financing round of a startup that used a Simple Agreement for Future Equity. This is a somewhat new document to raise funds (better known as SAFE like “convertible equity”) .

I think these instruments can be good in emerging markets. Lawyers in those markets still have a hard time to find a convertible note equal.[1]

As its name suggests, a SAFE is an agreement. It has clearer provisions than a convertible note and is used by an investor to get the right to buy shares of a company. This right is subject to a condition of a future event, such as the next equity financing or acquisition of a startup.

Nevertheless, in SAFE financings the investor is no longer a creditor. This means a SAFE investment is not a debt that a startup has, and thus no interests should apply.

Good for angel investors in emerging markets.

Angels continue to be the main source of seed capital funding in emerging markets. So SAFEs have a benefit for those angels that are not used to sophisticated instruments like convertible notes. [2]

Prior to SAFEs it was expensive for a startup to accept convertible notes for amounts of US$10,000 or less. The reason is a large percentage of a note covers attorney’s fees at the time of conversion. With SAFEs instead, more angels are able to jump into startup rounds that were impossible to get in before.

For more information on SAFEs, here is a post by Y Combinator http://ycombinator.com/safe/ . The reasoning behind Convertible Securities by Founder Institute http://fi.co/posts/690 is also worth reading.

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Notes

[1] This is not intended to be a legal summary about SAFE. It’s a friendly reminder that there are better instruments for founders to raise their rounds now. Legal counsel is essential to understand all the possible terms and negotiation scenarios.

[2] i.e. friends and family. Many of these angels continue to say “I prefer doing it on a more traditional way and have my shares”.

Special thanks to Vivek Boray, Anna Heim and Jonathan Lewy for reading drafts of this essay.