Here in Australia, we are starting to slowly see the rise of ‘SAFE Notes’ for early stage fundraising.
SAFE stands for ‘ Simple Agreement for Future Equity‘.
For us, anything that has ‘simple’ as part of its acronym has basically won us over already. At Cake, it’s all about simple and fast.
The SAFE Note was first created by Y Combinator in 2013.
In short, it is pretty much the same as a Convertible Note, but without the ‘debt’ element.
SAFE Notes have risen to popularity, with tech start-ups in Silicon Valley using them frequently. We are now seeing them appear more often in Australia.
Just like with Convertible Notes, SAFE Notes are used by early-stage companies where valuations are not so simple. They are also used where the company may not have the time or resources required for a standard equity raise (even when done virtually).
Like the Convertible Note, they require less documentation than a standard equity raise. The only document required is the SAFE Note instrument.
And surprise-surprise, just like Convertible Notes, they are often used as ‘bridging rounds’ between equity raising rounds.
In our Convertible Notes article, we mentioned how one benefit of the Convertible Notes was the time they save on negotiation.
Basically, the SAFE Note avoids one further topic of negotiation between the Company and the Investor – terms relating to the loan.
SAFE Notes do not have a loan (debt) element, so they therefore do not need to address the interest rate, the maturity date, and whether any collateral needs to be applied. Instead, an investor makes a cash payment in return for a contractual right to convert that payment into shares.
SAFE Notes have many of the same features of a Convertible Note, without the features relating to a loan.
These features include:
As there is no loan element in a SAFE Note, there is no maturity date. This means there is
And if the Trigger Event never occurs? Well, then the cash is never paid back.
In reality, even with Convertible Notes, it is quite rare that the loan is actually paid back in cash. Usually, the loan is converted into shares, and if not, it is often because the Company has become bankrupt, so the Investor will be claiming its funds as a creditor that way.
Long story short – SAFE Notes are just like Convertible Notes, but with a little less complexity.
Although they could be considered slightly more risky for the investor, the reality is that most investors never set out to be ‘lenders’ anyway. And in fact, many are actually more open to a cash injection. This option may also provide accounting or tax benefits for the investor.
The clear advantage of SAFE Notes is the speed at which they can be set up. Less negotiations, means less time, and less money spent on legals.
Ben Sand, founder of $500 million startup Meta, has commented on the positive impacts SAFE Notes could have in Australia:
“My goal is to bring the best tools I’ve learned in Silicon Valley to help startups in Australia achieve a strong impact for the world. I’m very happy to see the SAFE becoming more widely used in Australia. And as it becomes the standard, local companies will be more competitive in the global market and have greater impact.”
However, as always, founders should always do the math before signing the deal. Don’t give away more ownership that you are prepared to. Play around with your cap table on Cake to see the impact a SAFE Note could have for you.
So once again, if the timing for an equity raise just isn’t right for you now, you can consider a SAFE Note.
Pushing on without sufficient funding in these conditions can be risky. It is becoming increasingly important to save your runway, and prepare for what the future may hold.
A SAFE Note can be set up in a matter of hours, and will require little to no maintenance as business continues.
Got queries? Get in touch!