Virginia Term Sheet - Simple Agreement for Future Equity (SAFE)
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FAQ
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.
How to Prepare a Term Sheet Identify the Purpose of the Term Sheet Agreements. Briefly Summarize the Terms and Conditions. List the Offering Terms. Include Dividends, Liquidation Preference, and Provisions. Identify the Participation Rights. Create a Board of Directors. End with the Voting Agreement and Other Matters.
A safe (Simple Agreement for Future Equity) term sheet is a type of investment instrument used in early-stage startup funding. It allows investors to provide capital to a startup in exchange for the right to receive equity at a later date.
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.
SAFE funds on the balance sheet When funds come in from a SAFE note, they are added to cash as a debit. We also credit the SAFE notes line item in your balance sheet. Since SAFE notes don't have a maturity date, they don't have to be paid back in 12 or 24 months.
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.
A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.
Instead, a SAFE note represents a right to purchase equity in the company at a future date, typically when the company raises its next round of financing or goes public. As a result, investors typically expect companies to classify SAFE notes as equity on their balance sheets.