Is a SAFE agreement debt or equity?

Finally, The Simple Agreement for Future Tokens (SAFT) is possibly the most unique of the four types of convertible instruments because it is the only type of convertible instrument that it is not debt at all, and does not convert into equity.

Are SAFEs good for founders?

SAFEs are attractive to founders, especially at the pre-revenue stage, for two reasons: They’re very simple. The founders don’t have to hire a lawyer to draft the agreement (although I wouldn’t discourage them from getting good legal advice).

What is a standard SAFE Agreement?

A safe is a Simple Agreement for Future Equity. An investor makes a cash investment in a company, but gets company stock at a later date, in connection with a specific event. A safe is not a debt instrument, but is intended to be an alternative to convertible notes that is beneficial for both companies and investors.

What is a SAFE investment agreement?

A SAFE is an agreement to provide you a future equity stake based on the amount you invested if—and only if—a triggering event occurs, such as an additional round of financing or the sale of the company.

Is a simple agreement for future equity a derivative?

Developed in 2013, a start-up-friendly funding mechanism called the simple agreement for future equity (SAFE) was conceived as a substitute for convertible debt. Like warrants and convertible debt, most SAFEs clearly are derivatives of the company’s equity.

What is the purpose of a simple agreement for future 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.

Are SAFE Notes equity?

SAFE notes are a type of convertible security, while convertible notes are a form of debt that can convert into equity once certain milestones are met. Because of this, convertible notes usually have a maturity rate and an interest rate.

How do SAFEs work startups?

A SAFE is a relatively simple document that startups commonly use to raise seed capital. A SAFE is a promise to issue a certain number of shares in the future – “Simple Agreement for Future Equity”. Unlike a convertible note, a SAFE is not debt, and so it has no deadline for repayment and no interest rate.

Is a SAFE agreement a loan?

Unlike a convertible note, a SAFE is not a loan; it is more like a warrant. In particular, there is no interest paid and no maturity date, and therefore SAFEs are not subject to the regulations that debt may be in many jurisdictions.

Is a simple agreement for future equity a security?

Are SAFEs taxable?

A SAFE Should Not Be Treated as Debt for Tax Purposes Many instruments bear indicia of both debt and equity. For example, in certain circumstances, convertible debt may be treated as equity for tax purposes. However, it seems clear that a SAFE should not be treated as debt for U.S. federal income tax purposes.

What is a safe agreement?

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.

What is a safe equity?

Simple agreement for future equity (SAFE) A SAFE (simple agreement for future equity) 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.

What is a safe financing?

SAFE is a seed-stage financing tool that provides a lower-cost, speedier alternative to convertible debt financings. SAFE was devised by Y-Combinator partner Carolynn Levy, who is also an attorney. The SAFE documents are designed to be short (about 5 pages, which is short for legal documents), and fairly standardized.

What to use as the equity risk premium?

Equity risk premium is used to attract investors to commit their money to a particular project. The higher the percentage of the premium, the more risk involved in the investment. An equity risk premium is one of the many indicators that investors review before making an investment decision.