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What is a SAFE?
A Simple Agreement for Future Equity (SAFE) is an agreement that an early-stage startup makes with an investor—typically when raising money during a seed round.
What are common terms used in SAFEs?
- Valuation cap: the highest valuation at which the SAFE will convert into equity.
- Discount rate: the percentage discount that the SAFE's investor receives when converting their SAFE to equity in the future.
- Conversion price: the price at which the SAFE converts to equity, based on the valuation cap and discount rate.
- Investor rights: the rights and protections that investors have when investing in a startup through a SAFE. These are usually determined by the valuation cap, discount rate, and many more terms.
- Triggering event: an event that causes the SAFE to convert to equity, such as a qualifying financing round, acquisition, or IPO.
- Dilution: the reduction in ownership percentage that existing shareholders experience when new shares are issued during an equity round (including SAFEs that convert into shares).
- Pro rata rights: the right of an investor to participate in future equity financing rounds to maintain their ownership percentage.
- Most favored nations (MFN) provisions: a clause that ensures the investor receives the best terms of any future investor for the same security.
What is the difference between pre-money and post-money SAFEs?
A pre-money safe converts into equity based on the company's valuation immediately prior to the financing round, without accounting for the amount being invested, while a post-money safe converts into equity based on the company's valuation after accounting for the new investment.
Learn more about the difference here.
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