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What Is a SAFE (Simple Agreements for Future Equity) in Crypto?
Content provided by various contributors. DYOR.
Simple Agreements for Future Equity (SAFE) is a financing instrument used in the crypto and start-up communities to secure early-stage funding without giving up ownership or control.
A SAFE is a contract between a startup and an investor that promises the investor a certain amount of equity in the company in the future in exchange for a direct cash investment. The terms of the SAFE, including the valuation of the company and the equity to be received, are agreed upon in advance.
SAFEs are considered simple because they are straightforward, easy to understand, and require less legal documentation than traditional equity financing. They also don’t have any expiration date and no interest or dividend payments.
The key benefit of SAFE for startups is that they can quickly secure funding without giving up any ownership or control of the company. For investors, SAFEs offer a way to invest in early-stage companies with the potential for high growth.
How SAFE Works
In practical terms, here’s how a SAFE works:
- A startup seeking funding creates a SAFE and offers it to potential investors.
- An investor decides to invest in the startup and signs the SAFE.
- The startup receives the cash investment from the investor.
- When the startup raises a future equity financing round, the SAFE converts into equity at the agreed-upon valuation.
- The investor receives equity in the company based on the terms agreed upon in the SAFE.
For example, a startup might offer a SAFE with a valuation cap of $10 million. This means that the investor will receive equity in the company based on the $10 million valuation, regardless of the company’s actual valuation at the time of conversion. Conversely, if the company’s valuation at the time of conversion is higher than $10 million, the investor’s equity will be based on the lower $10 million valuation.
SAFE vs. SAFT
SAFE (Simple Agreement for Future Equity) and SAFT (Simple Agreement for Future Tokens) are similar, but they serve different purposes in the crypto and start-up communities.
A SAFE is a financing instrument startups use to secure early-stage funding without giving up ownership or control. Instead, it promises investors a certain amount of equity in the company in the future in exchange for a direct cash investment.
On the other hand, a SAFT is a contract between a start-up and an investor that gives the investor the right to receive tokens (i.e., cryptocurrency) in exchange for a direct cash investment. The terms of the SAFT, including the price and number of tokens to be received, are agreed upon in advance.
SAFTs are often used for initial coin offerings (ICOs), where a start-up issues tokens to investors in exchange for funding. SAFTs are considered a way for investors to participate in ICOs before the tokens are available to the public.
SAFEs are a flexible and cost-effective way for startups to secure early-stage funding and for investors to invest in high-potential companies. As a result, they are an increasingly popular alternative to traditional equity financing, especially in the fast-paced world of crypto and start-ups.
The main difference between SAFEs and SAFTs is the type of investment being made. A SAFE is for equity, while a SAFT is for tokens. Nevertheless, both instruments serve as a way for startups to secure early-stage funding and investors to participate in high-potential companies or token offerings.
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