Montana Term Sheet - Simple Agreement for Future Equity (SAFE)
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FAQ
A simple agreement for future equity (SAFE) is a contract between an investor and a portfolio company that provides rights to the investor for future equity in the company. It does this without determining a specific price per share when the investment is made.
Term sheets are also often used for SAFE or convertible note rounds, but are used less frequently than for priced rounds because of the relative simplicity of SAFE and convertible note legal documents.
It was originally created by Y Combinator in 2013. A typical SAFE sets out an investment amount, a valuation cap, and a discount, but does not include a maturity date or interest. This means that it is possible that a SAFE investment may never be repaid if an equity funding round doesn't happen.
A SAFE note term sheet is a legal document that aligns early-stage startup funding interests by outlining the key investment agreement terms for entrepreneurs. It is a comprehensive blueprint outlining an investment agreement's fundamental terms and conditions.
Experienced venture capitalists expect to see SAFE notes in the equity section of a company's balance sheet - therefore, they should be classified as equity, not debt.
KISS has many of the same elements as SAFEs but could include maturity dates, interest, and other investor rights. SAFEs are not loans. There is no interest and no maturity date. Convertible notes accrue interest until conversion.
As an entrepreneur seeking funding, you have a variety of term sheet options, including the safe (simple agreement for future equity). Originally created by Y Combinator as an alternative to convertible notes, the safe maintains the flexibility of a convertible note but addresses many of its problems.
They are accounted for as equity on the balance sheet. When the Simple Agreement for Future Equity converts to preferred stock, the accounting entries are that the SAFE entry is removed and the amount is credited to preferred equity (ignoring any APIC implications).
Discount rate: It allows the SAFE investor to convert to equity at a discounted price in the course of a subsequent round of financing. Discount rates typically range between 10% and 25%, and the discount factor is calculated as follows: [100 ? discount rate]%.
If there is a Liquidity Event before this safe is amended by the MFN Provision, the investor could elect to have the Purchase Amount repaid, or to convert the safe into shares of common stock, based on the fair market value of the common stock at the time of the Liquidity Event.