The SAFE - Is it time for change?

Founders and investors shaking hands above a table

The SAFE is a great raising instrument - there are no doubts about it.

Since its inception in 2013, the SAFE has been used across various jurisdictions, from start-ups ranging from Pre-Seed Stage, to Series B+. It is often used where company valuations are not easily determined, and also to accelerate racing start-ups, in ad hoc “bridging rounds”.

Y Combinator created the SAFE, with the aim of faster capital raising, with less negotiation and complexity (or in other words, less headaches). And for the most part, that goal has been achieved. Cake users can now generate and send a standard SAFE on the platform, in under 2 minutes.


While the SAFE has removed or delayed a lot of the complexity and time usually involved in capital raising, there are still a number of points that should be clarified or improved. Founders and investors may think they understand their SAFE, but simple differences in the terms can hurt down the road.

Not so long ago, Australian investors (via AVCAL, now AIC) developed a local version of the SAFE to help early stage funding. The AVCAL version of the SAFE was an Australian interpretation of the YC version. It kept many of the key features, along with some of the tricky parts, but was adapted to local conditions. As the AVCAL version of the SAFE became widely adopted, and adapted by some, these tricky issues propagated. We need to give credit to the team that developed the AVCAL SAFE, but it’s now time to reset, just as YC did in 2018.

So what’s the solution? SAFEr!

A new SAFE inspired by the YC template, but shaped for fundraising in the Australian context with upgrades from what we’ve learnt.

Why not just use the YC template? The Australian ecosystem often follows what happens in the United States, but we have our own regulations. For example, we have different tax rules that incentivise investing in early stage startups. The YC and AVCAL templates are not able to facilitate these incentives and the policies behind them.

With input from Hall Chadwick and Archangel VC, we highlighted below a few simple issues in the current SAFE that often cause confusion and misunderstandings. We plan to remove these issues and add some improvement to create a new Australian SAFE that will benefit both founders and investors.

Less confusion = more collaboration, quicker deals and better relationships.

We welcome any comments or additions to the below, and will be back soon with our proposed SAFEr template!

Pre-Money vs Post-Money

By YC’s own admission, the original 2013 SAFE was not clear on whether the conversion occurred on a pre-money or post-money basis. The general consensus was that it was pre-money, but the fact that it was not immediately clear, was an obvious flaw.

As we mentioned before, in 2018 YC updated their SAFE templates. A big part of this update was to resolve the existing pre vs post money issue. Despite this, a lot of founders and investors in Australia are still using the AVCAL template produced in 2015, which still contains this ambiguity.

So, just as YC did in 2018, we’re making the valuation cap post-money. Australian investors were already starting to do this, so let’s just make it standard. It also brings us inline with the US, makes it easier to calculate and gives more certainty to founders and investors.

Discounts - Do we really need to talk about it?

Let’s make it standard: The discount that the SAFE provides to the investor on conversion is up for discussion. While there are clear advantages of allowing the template to be customised to fit each deal, wouldn’t it just be SAFEr, if all SAFEs came with the same standard discount?

The purpose of the discount is to provide a return for the period from SAFE investment to the next round. A 20% discount amounts to a 25% return (ie 80c buy price on a $1 round is a 20c gain on 80c buy price). This is accepted as an adequate return for the investor, as equity rounds are usually within 6 months (12 max) from the time of the SAFE.

For example, the most common discount we see used in SAFE is 20%. This is actually rarely departed from. So, why not just insert that discount into the template, and then any departure from that would be bespoke, and would be worth the discussion. But unless that’s the case, why not just save that conversation, and increase transparency and adoption of what is fair and standard on both sides!

The clear risk of leaving the discount open for discussion, is that inexperienced founders may enter a figure which falls well out (on either side), unless they’ve received advice otherwise. A larger discount can create major issues if the startup requires a down round and therefore should be discouraged. Whereas a smaller discount can create issues with fairness with investors and while the startup may get the money they need, this might bite them later.

If it gave them the ‘standard’, then the negotiation just became a whole lot easier - and just like that, they can continue to build great things, rather than talk about contracts.

Let’s make the formula clear: One other minor flaw in the SAFE is the way the discount rate is specified in the schedule, in comparison with how the conversion formula is applied.

For example, many founders may insert “20%” into the schedule, but when the conversion formula is applied by multiplying the Discount Rate by the Share Price, it can actually cause the discount to become 80%. Whoops.

While in practice, founders and investors would be quick to accept this as a drafting error (and so would the courts if it got there), it’s just easier to clear things up.

To do this, the way the Discount Price is calculated should allow for the actual Discount Rate to be stated in the schedule, not another formula. It’s not that hard!

“Discount Price means the price per share of the QF Shares issued in the Qualifying Financing reduced by the Discount Rate."

Or..

“Discount Price means the price per share of the QF Shares issued in the Qualifying Financing reduced by 20%.”

Here’s an easy one

The AVCAL template refers to the SAFE as a “deed” and even states that it is “executed as a deed”. We don’t think anyone in Australia (especially pre the electronic signing of deeds was permitted during Covid) has executed the SAFE as a deed. It’s a Simple Agreement for Future Equity, so let’s just call it an agreement.

So what’s a trigger event?

Most SAFEs will trigger conversion in the event of a “Qualifying Financing”. However, the Qualifying Financing definition is rarely specified in terms of a threshold. This causes a lot of confusion where early stage companies need to do a quick bridging round, but are wary that they may convert all SAFEs earlier than planned.

For example, should raising an extra $50k from family and friends trigger the conversion of all SAFE conversions, based on the F&F share price?

And while we are talking standard, why not make that threshold a standard? Why not say that the Qualifying Financing must be for at least $500k, or more than 5% of company equity, for the SAFE Conversion to be triggered?

And for those who want something a little extra?

We are fully supportive of more sophisticated investors using SAFEs to fund early stage companies too. And we do accept that, by way of the nature of their business, they will often require a few additional terms that may not be in the “standard” SAFE template.

So why not create a VC SAFE Letter - a standardised side letter accompanying SAFE Notes, that VCs can request as part of their investment.

The kind of terms we’d expect to be in this side letter may include the following:

  • Information Rights - VCs will likely require these to handle their regulatory obligations;
  • Pro-Rata on future SAFEs and priced rounds - VCs will likely want pro-rata rights applying from the date of the SAFE, as if it was an equity investor from that date,
  • Sunset clause - a date requiring the SAFE to be converted to ORDs, if the trigger event has not occurred by then.

Once this VC SAFE Letter becomes the norm, founders will not need to worry so much each time a VC marks up their SAFE or sends them a document they haven’t seen before - it would truly be the “standard”.

ESIC Blues

This is something peculiar to Australia, and is well worth thinking about!

One of the last bastions of a tax free gain is investing in 'eligible' startups. The ESIC rules are extremely generous and proportionately complex. Normally, we encourage Founders to consider ESIC and if it is clear cut, investing for shares instead of a SAFE note and the tax free element can massively outweigh the benefits of a discount if the Startup becomes a Unicorn or at least wildly successful.  A company can have too much or too little revenue, expenses, capital raised, prospects for growth or have any part of these elements in the wrong mix and lose the tax benefits.

Using a SAFE note massively reduces your chances of being eligible for ESIC as you defer and easily become disqualified by one or more of the elements at the time of conversion to equity.

So what’s next?

So you’ve heard our thoughts, now we want to hear yours. What changes would make your SAFE SAFEr? Once we’ve got the feedback, look out for the open source SAFEr template, ready for your (Safe) benefit!

If you liked this article, check out 7 Capital Raising Mistakes a Start-up Should Avoid or The Capital Raise Checklist – Are you ready for a raise?

This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.