A Delaware Term Sheet — Simple Agreement for Future Equity (SAFE) is a legal document used by startups or early-stage companies to raise capital from investors without the need for immediate valuation or dilution discussions. It provides a framework for future investment rounds, outlining the terms and conditions of the investment in exchange for equity in the company at a later date. A SAFE agreement is a financial instrument that has gained popularity in the startup ecosystem due to its simplicity and flexibility. It is often used in Delaware, a state known for its business-friendly environment and extensive corporate law infrastructure. The main purpose of a SAFE agreement is to establish a mutually beneficial relationship between the startup and the investor, allowing the company to secure financing while providing the investor with potential future equity upside. This type of investment structure is particularly attractive to early-stage investors who want to support promising ventures but are not ready to commit to a specific valuation. The primary type of Delaware Term Sheet — Simple Agreement for Future Equity (SAFE) is known as the "Post-Money SAFE." This agreement determines the investor's equity ownership based on the startup's valuation at the next equity financing round. If the startup proceeds with a substantial funding round, the investor's SAFE investment converts into preferred stock or common stock, depending on the terms outlined in the agreement. Another type of SAFE agreement is the "pre-Roman SAFE." This variant operates similarly to the Post-Money SAFE, except that the investor's equity is calculated based on the pre-money valuation of the company at the next funding round. This means that the investor's ownership stake is determined before additional capital is injected into the startup. There are several key terms and concepts commonly found in a Delaware Term Sheet — Simple Agreement for Future Equity (SAFE). These include the valuation cap, which sets a maximum valuation at which the investor's Safes convert into equity. The discount rate is the percentage at which the investor's Safes convert, providing them with a more favorable equity valuation compared to later-stage investors. Additionally, a SAFE agreement may include a pro rata rights clause, allowing the investor to participate in future financing rounds to maintain their ownership percentage. In summary, a Delaware Term Sheet — Simple Agreement for Future Equity (SAFE) is a widely utilized investment instrument that enables startups to raise capital from investors without determining an immediate valuation. This flexible agreement helps both parties establish a framework for future equity negotiations, potentially leading to the investor's conversion into preferred or common stock. The primary types of SAFE agreements are the Post-Money SAFE and the pre-Roman SAFE, each with its own valuation considerations and conversion mechanisms.
Delaware Term Sheet - Simple Agreement for Future Equity (SAFE)
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Accounting Perspective From an accounting standpoint, there is some debate over whether a SAFE note should be classified as a liability or equity on the balance sheet. This is because a SAFE note has characteristics of both debt (a liability) and equity.
Suppose a SAFE is issued with a 20% discount. This means if the SAFE investor invested $40,000 in a startup whose price per share at the time of future investment comes out to be $10, he'll get the share at a 20% discounted price, which is $8. This means he'll get 5000 shares instead of 4000.
term investment is an account on the asset side of a company's balance sheet that represents the company's investments, including stocks, bonds, real estate, and cash. Longterm investments are assets that a company intends to hold for more than a year.
A SAFE note is a security that is going to convert to stock at a future point, usually at a pre-negotiated price cap. Let's look at an example. A person might invest in a SAFE note with a $10 million cap. If the company is bought for $100 million, that's great news.
In recent years, SAFEs have become the most common convertible instrument due to their relative simplicity. Like convertible notes, SAFEs convert into stock in a future priced round. Unlike convertible notes, they are not debt and do not require the company to pay back the investment with interest.
SAFE vs Convertible Note However, a difference between these two instruments is that a convert is accounted for as a debt instrument, whereas a SAFE lives in the equity section of a balance sheet.
Cons: SAFE investors assume most, if not all, of the risk, in that there is no guarantee of any equity ownership in the company. ... A SAFE holder is not entitled to any company assets in the event of a liquidation.
SAFE notes are classified as equity on the balance sheet until conversion ? learn about how to account for SAFE notes.