What is a SAFE note? All you need to know

SAFE (Simple Agreement for Future Equity) notes are a popular financing tool used by startups to raise capital in exchange for a promise to give investors equity in the company in the future, usually after a triggering event such as a future equity financing round. SAFE notes are flexible, fast, and less complex than traditional fundraising methods like convertible notes or equity investments.

Key Elements of SAFE Notes

1. Conversion to Equity: Unlike traditional debt, SAFE notes do not accrue interest and don’t have a set repayment date. Instead, they convert into equity (shares) in the company when a future financing event happens, such as the next round of fundraising or an acquisition.
2. Valuation Cap: This is the maximum valuation at which the SAFE note will convert into equity. It protects early investors from being diluted too much if the company's valuation skyrockets during later rounds.
3. Discount Rate: Investors are often given a discount rate, typically around 10-20%, which allows them to convert their investment into shares at a lower price than new investors in the future financing round.
4. No Interest or Maturity Date: SAFE notes do not function like traditional debt, meaning they don't have interest payments or a maturity date. Instead, the investor waits for an event that will trigger the conversion to equity.
5. Trigger Events: A SAFE note typically converts to equity during one of the following events:

SAFE notes are popular among early-stage startups and investors because they are simple to draft, don’t require extensive negotiation, and allow companies to delay setting a formal valuation.

Types of SAFE Notes

1. Traditional SAFE: This version converts to equity without any valuation cap or discount rate. The conversion terms depend solely on the terms set during the triggering equity round.
2. Capped SAFE: Includes a valuation cap, ensuring that early investors convert their notes into equity at a lower price if the company's valuation grows significantly.
3. Uncapped SAFE: Does not set a valuation cap but may include a discount rate to offer early investors an incentive over later investors.
4. Post-Money SAFE: These give investors a clearer idea of their ownership percentage post-conversion by including all outstanding SAFEs in the calculations for conversion.

Benefits of SAFE Notes

• Simplicity: SAFE notes are straightforward to draft and negotiate, which saves time and legal costs compared to traditional financing methods.
• Flexibility for Startups: They allow startups to raise funds without the pressure of immediate repayments, interest accumulation, or setting an early valuation.
• Early Exit Opportunities for Investors: Investors can often cash out early if the company is acquired or goes public.
• No Debt: SAFE notes are not considered debt, so there is no interest or repayment obligation.

Drawbacks of SAFE Notes

• Uncertainty for Investors: Because SAFE notes are not debt, investors may have to wait a long time for their investment to convert to equity, and they may not know how much ownership they will get.
• No Guarantees: SAFE notes do not guarantee any returns for investors if the company does not reach a triggering event.

SAFE Notes vs. Convertible Notes

While SAFE notes are similar to convertible notes, the key difference is that convertible notes are considered debt with an interest rate and a maturity date, while SAFE notes are not debt and don’t have these features. Convertible notes also typically include a repayment obligation if no triggering event occurs, whereas SAFE notes do not.

Notarization and Documentation

SAFE notes typically do not require notarization as they are simple investment agreements. However, if additional legal documents like promissory notes are involved, notarization may be recommended to ensure authenticity and enforceability.

Discover the Power of BlueNotary:

Integrate your Business, Title Company, or Law Firm to Satisfy your Customers and Decrease Turnaround

Get a document Notarized/Sign-up

Join the Free Notary Training Facebook Group

In Conclusion

SAFE notes provide a flexible and simple method for startups to raise early-stage funding without having to set a formal valuation. They are advantageous for both startups and investors due to their ease of use and potential for future equity conversion. However, as with any investment tool, both parties should carefully understand the terms, consult legal professionals, and be aware of potential risks associated with using SAFE notes.

Make informed decisions with confidence using BlueNotary's expert blog advice. Our reliable tips and practical strategies support your choices, empowering you to take control.