Part 1: SAFEs (Simple Agreement for Future Equity) and advance subscription agreements

1. What is a SAFE?

A SAFE (or Simple Agreement for Future Equity) is an advance subscription for shares. The company receiving the subscription receives cash from an investor, but that investor doesn’t receive any shares until further down the line. They are also often called ASAs (Advance Subscription Agreements) in the UK.

2. Why would I use a SAFE or ASA instead of issuing shares directly?

SAFEs can be a quick way for a company to access funds, without the lengthy negotiation sometimes associated with a direct investment for shares. They were first introduced by YCombinator – a well-known Silicon Valley accelerator (more on that below…) – in 2013, and designed to be ‘Simple’, as the name suggests.

The other common reason for using a SAFE or ASA is when the company and the investors cannot agree a valuation or when the Company does not want to commit to a valuation. By using a SAFE, the ‘official’ valuation is deferred to a later time (although only to an extent as a SAFE will often have a ‘default’ valuation). 

3. When does an investor actually get the shares?

A SAFE incorporates various ‘conversion’ events, which trigger the investment to turn into shares (usually the most senior class of shares in the company at the time of conversion).

The most significant conversion event is a later investment for shares by third party investors but breach, insolvency or a sale of the company are usually also conversion events. 

The number of shares an investor will get for their investment at that point depends on the key terms agreed between the parties, which will be considered in Part 2. 

4. Can an investor ever get their money back, instead of shares?

SAFEs are not intended to operate like loans, so investors generally do not have broad rights to their money back. However, sometimes companies and investors negotiate a set of limited circumstances in which an investor might be entitled to their money back (this might even be at a premium).

This doesn’t apply to SEIS/EIS investments unfortunately, please see q.7 below.

5. It sounds great! What could go wrong?

Investors might feel that entering into a SAFE offers them limited protection compared to a direct investment for shares. This can be two-fold – they might not receive a suite of warranties in a relatively short and simple SAFE, for example, and it also might mean that they have less input on the long-form documentation (i.e. the shareholders agreement and articles of association) relating to the shares when it comes to conversion.  

An investor in a SAFE is relying on later investors to protect their rights as they will generally ‘piggy back’ on the later investment terms.

On the flipside, the company needs to be aware that the lengthy negotiation that can come with preparing investment documentation may still be required further down the line when it comes to conversion and issuing shares in the company.

6. It looks like YCombinator have some standard form SAFEs I can use for free, shall I use that to draft a SAFE by myself?

The YCombinator documents are designed for use in the US and aren’t necessarily the best option for UK companies. Instead, we recommend using a version designed to operate under UK law (which we can help you with).

7. Is a SAFE compatible with SEIS/EIS investment?

SAFEs are generally compatible with SEIS/EIS provided that the investment money will definitely turn into shares at some point, and there is no way the investor has a right to its money back instead. In addition, the long-stop date for conversion of the funds into shares should generally be six months or less (which ensures that the money really is ‘on risk’).