SAFE: how to agree upfront, not in court

When external money comes into a business at an early stage, a classic share purchase deal is often unnecessary – it is hard for both partners and the investor to value a company that has just appeared.
In this case SAFE (Simple Agreement for Future Equity) becomes useful – a tool that allows the investor to give money now in exchange for the right to receive an equity stake later, when the company raises a proper round and a clear valuation appears.
For founders, SAFE is a way to avoid sitting down at the negotiation table over valuation at a moment when the company has nothing to justify it with yet. For the investor, it is a way to enter early, accepting risk in exchange for potentially better terms in the future.
But here too the devil is in the details that should be fixed in advance:
cap – the maximum company valuation at which the SAFE converts into equity, even if the next round happens at a higher valuation;
discount – the discount to the price of the next round at which the investor receives their stake;
conversion trigger – the specific event that turns the SAFE into an actual equity stake: the next investment round, a sale of the company, or a particular date;
priority of rights – what happens if the company has several SAFE agreements with different terms, and how they rank against each other upon conversion.
SAFE is a flexible instrument, but that flexibility is also a risk. If the terms are not drafted clearly, founders may give away a larger stake than they planned, and the investor may receive less than expected.

The key rule

Both the partner agreement and SAFE work on the same principle: they move trust from the level of “we agreed verbally” to the level of “here is what is written, and everyone has signed it”.
This is not about mistrust of each other. It is about choosing to trust consciously – knowing the rules of the game in advance instead of discovering them in the middle of a conflict or in court.
If an issue is important enough to argue about after the business is already running and making money, it is important enough to discuss before a single hryvnia is invested.
If you have any questions or problems, please contact our lawyers for an individual consultation and professional legal assistance.
Author: Ihor Yasko, managing partner of Attorneys Union “Law Company ‘WINNER’”, PhD in Law.