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

The SAFE is a very popular startup funding vehicle. It can (but doesn't always) result in the SAFE investor receiving SAFE Preferred shares upon the equity conversion. These are very similar to standard preferred shares, but with differences in liquidation preference (we show a simple liquidation preference example using a 1x participating liquidation preference), conversion price, and dividend terms.

Basic terms that are discussed include pro-rata participation rights, discount, pre-money valuation cap, liquidation preference, MFN (Most Favored Nation). And I compare the SAFE to the convertible note, another popular type of convertible security. Unlike the convertible note, the SAFE has no interest rate and no maturity date, so it is simpler and more entrepreneur friendly than the convertible note.

This StartupSOS channel provides practical, how-to advice for new entrepreneurs who plan to build a growth startup with investor funding.