An alternative to convertible bonds is an agreement between an investor and a company, in which the company generally promises to give the investor a future stake in the business if certain trigger events occur. SAFEs were designed to allow venture capitalists to invest quickly in startups and were designed to be generated faster than lower-cost convertible bonds. Agreements have recently intensified, particularly on the West Coast, including In Silicon Valley. One of these “simpler” possibilities is a fundraising tool called SAFE (simple agreement on future capital). It was invented by the people of Y Combinator about five years ago. (Y Combinator is a West Coast incubator/accelerator that makes small seeded investments in many start-up companies in exchange for 7 percent equity.) Historically, most start-ups have been financed either by equity or by loans in the form of convertible debt securities. However, some hybrid tools have recently been created to finance startups. Especially, and very popular these days, is the use of an instrument called SAFE. “SAFE” is an acronym for “simple agreement for future capital.” A SAFE is a contract to obtain an amount of equity that will be fixed in a future price cycle for which the investor pays the purchase price in advance. Developed and published by Y Combinator at the end of 2013, SAFE aims to provide a more efficient, clearer and simpler alternative to convertible bonds and, in particular, certain aspects of convertible bonds (including a defined term, interest rate and maturity date).
Despite their name, FAS is not always as “simple” as expected, and it is not necessarily “for future capital” if the conversion never takes place. The pros and cons of SAFes for businesses and investors are discussed below. Y Combinator, a well-known technology accelerator, created the SAFE rating in 2013 (simple agreement on future capital) and uses it to finance most start-ups participating in three-month development meetings. Since 2005, Y Combinator has funded more than 1,000 startups, including Dropbox, Reddit, WePay, Airbnb and Instacart. At an annual SEC/NASAA conference on May 9, Commissioner Michael S. Piwowar raised concerns about the use of SAFEs with retail investors in Regulation`s crowdfunding. Unlike risk-paying investors, SAFE “are not securities that many retail investors are familiar with,” Piwowar said. He added: “Intermediaries face a real challenge in informing potential investors of this complex, non-standardized high-risk security when the title itself is titled “SAFE.” Companies and their intermediaries should think carefully about how they name or describe their securities. Titles that are marketed as “safe” or “simple” should be exactly that. Some issuers offer a new type of security as part of some crowdfunding offers they have called safe. The acronym means Simple Agreement for Future Equity.
These securities are risky and very different from traditional common shares. As the Securities and Exchange Commission (SEC) states in a new investor newsletter, despite its name, a SAFE offer cannot be “simple” or “safe.” A SAFE is an agreement between you, the investor, and the company in which the company usually promises to give you a future stake in the business if certain triggering events occur. Not all FAS is the same and the very important conditions for obtaining future equity may vary depending on the SAFEs offered in different crowdfunding offers.