The Washington Term Sheet — Simple Agreement for Future Equity (SAFE) is a legal document commonly used by startups and early-stage companies to raise funds from investors. It serves as a simplified alternative to traditional equity financing, providing a framework for future equity investments while deferring valuation discussions until a later financing round. The Washington Term Sheet — Simple Agreement for Future Equity (SAFE) operates based on the principle of a convertible note, but without the debt component. Instead, it allows investors to purchase equity in the company in the future, contingent upon specific trigger events outlined in the agreement. This structure offers flexibility and streamlines the fundraising process, as it does not involve setting an immediate valuation. There are several variations of the Washington Term Sheet — Simple Agreement for Future Equity (SAFE) that cater to different investment scenarios. Some notable types include: 1. Valuation Cap SAFE: This version incorporates a predetermined cap on the company's valuation, safeguarding investors from excessive dilution in case of a significant increase in valuation during subsequent funding rounds. 2. Discount SAFE: This type provides investors with the opportunity to secure equity at a discounted rate in comparison to future investors participating in subsequent financing rounds. 3. Post-Money SAFE: In this variant, the investor's equity stake is calculated based on the company's valuation following the completion of a specific funding round. It ensures transparency by explicitly detailing the investor's ownership percentage. 4. Prorate Rights SAFE: This type of SAFE grants investors the right to participate in future funding rounds to maintain their ownership percentage, preserving their investment stake as the company grows. The Washington Term Sheet — Simple Agreement for Future Equity (SAFE) enables startups to attract early capital from investors without engaging in intricate valuation negotiations. However, it is vital for both parties to thoroughly understand the terms and implications of the agreement, seeking legal advice when necessary, to ensure a fair and mutually beneficial arrangement.
Washington Term Sheet - Simple Agreement for Future Equity (SAFE)
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FAQ
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.
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.
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.
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 notes are classified as equity on the balance sheet until conversion ? learn about how to account for SAFE notes.
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.
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.
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.