Kendrick Law Practice www.kendricklaw.net © All Rights reserved. 2015

SAFE AGREEMENT

1 WHAT IS A SAFE AGREEMENT?

“SAFE” stands for simple agreement for future equity. This type of agreement is just as it

sounds; it’s an agreement between an issuer of equity, or a company, and an investor for

future, as opposed to present, equity that is triggered upon some event happening. The

event can include liquidation, a regular equity round of financing, an IPO or a merger or

acquisition.

2 WHAT IS THE PURPOSE OF A SAFE AGREEMENT?

The purpose of a SAFE Agreement is to replace convertible notes in most cases.

Convertible notes1 are debt whereas SAFE Agreements involve equity. This replacement

makes it easier and more advantageous for companies to raise capital.

3 WHAT ARE THE ADVANTAGES OF A SAFE AGREEMENT VERSUS A CONVERTIBLE NOTE?

The paperwork and process of developing a SAFE Agreement is simpler and more

straightforward than a convertible note. Debt, or loans, are highly regulated and require an

experienced lawyer to make sure that the language in a convertible note document is

correct and legally binding. A safe agreement is relatively simple and does not have the

rules that come with issuing debt. Investors can invest faster and issuers can raise capital

quicker with SAFE Agreements.

Additionally, SAFE Agreements save on legal fees since its’ simpler to draft and no

company charter amendment is needed like when raising regular equity. Since SAFEs are

for future equity not debt, the principal investment does not accrue interest that the issuer

would have to pay. There are, of course, some disadvantages.2

4 HOW DO THEY WORK?

The investor and company agree on a valuation cap (versus interest rates and terms of

default as in a convertible note), the agreement is signed and the investor sends the

amount of investment to the issuer. Then nothing happens until there is a “triggering event”

as defined in the SAFE agreement that triggers the investor obtaining equity in the company

based on the liquidation preference equal to the original investment amount in the SAFE.

1 A convertible note is a loan that converts into equity after the company has a bit more operating history under its belt and there is more information available to establish a fair price. (https://wefunder.com/post/17-convertible-notes, accessed Aug. 11, 2015) 2 Disadvantages to the investor include, but are not limited to, subrogating your liquidation position as debt holders are paid before equity holders. Disadvantages to the company include, but are not limited to, giving up more equity in the future as the price to pay to investors for not taking equity at the present moment.

Kendrick Law Practice www.kendricklaw.net © All Rights reserved. 2015

SAFE AGREEMENT

5 IN WHAT CIRCUMSTANCES WOULD SAFE AGREEMENTS NOT WORK?

If the pre-money valuation of the company in the equity financing round is lower than the

valuation cap in a SAFE, a safe holder gets the same preferred stock, at the same price,

with the same liquidating preference, as the other investors of new money in the financing

round. If the pre-money valuation of the company in the financing round is higher than the

valuation cap in the SAFE, the investor would have preferred stock that will have a

liquidation preference equal to the original safe investment rather than based on the price of

the new shares issued to investors in the financing round.3

6 WHAT IS THE DIFFERENCE BETWEEN SAFE PREFERRED STOCK AND STANDARD PREFERRED

STOCK?

SAFE Preferred stock will have the same rights and privileges as standard preferred stock

but the liquidation preference, conversion price, and dividend rate will be calculated based

on the price per share of the SAFE Preferred Stock. In other words, SAFE preferred stock

holders receive a heightened preference in the price per share which makes their liquidation

preference, conversion price and dividend rate more attractive to investors than the

standard preferred stock. But again, that’s only if the pre-money valuation of the company in

the equity financing is lower than the valuation in a standard SAFE4; otherwise, the

valuation cap has no application or bearing on the SAFE Agreement and SAFE preferred

stockholders receive the same of all rights and privileges as standard preferred

stockholders.

7 ARE THERE DIFFERENT VERSIONS OF A SAFE AGREEMENT?

Yes, there are three (3). They each work differently.

1. Cap and Discount- A SAFE with a negotiated valuation cap and discount rate. The

SAFE holder receives either the valuation cap or discounted rate when converting to

SAFE preferred stock, which ever makes the price per share lower.

2. Discount, no cap- A SAFE with a negotiated discount rate. The valuation cap has

no bearing in this case.

3. No cap or discount, MFN provision- A SAFE can be amended to reflect provisions

that are advantageous to the SAFE holders in a future equity round of financing. If

there is equity financing before amending, a SAFE investor would receive the same

shares of preferred stock as the investors of new money at the same price.

However, there is no conversion unless the new money is more than $250,000

8 WHAT DOES A SAFE AGREEMENT’S TERMS LOOK LIKE?

Consult a lawyer. Each situation is different.

3 This is only under a “standard SAFE”. 4 To be discussed in No. 7.