Y-Combinator SAFE Agreement Briefing

Why is this document important?

This document is important because it’s probably the most used investment agreement for early-stage startups.

SAFE, meaning “Simple Agreement for Future Equity”, is summed up in the title. It is an agreement between the startup and investor, by which the investor is promised that he will convert the money given to the startup into equity or shares of such company on a future date.

What’s important is that this SAFE has been translated into several languages. There is even the iSAFE which is the Indian SAFE, for companies based in India. There are several of those in Law Insider.

In Chile, the ACAFI, which is an organization formed by local venture capital firms, has it’s own version of the SAFE in Spanish. It differs a lot from the original one.

That’s where the teardown begins most of the time. Some lawyers and investors tend to draft convertible instruments and give them the name SAFE, because it sounds fancy and marketable. But these differ a lot from the Y-Combinator ones.

For example, as I was preparing this, I came across a fundraising document of an Estonian Company titled “Simple Agreement for Future Equity” but it doesn’t have much to do with the Y-Combinator’s SAFE. It has a maturity date, and SAFEs are not debt instruments, so they do not have maturity dates.

For us international lawyers, when we browse through documents, we may find many that are not what they say they are. Fortunately, there are lots of good documents as well. SAFEs that are really SAFEs and not just marketing words.

Getting Into the Document

Valuation Cap is something to negotiate

Investors and founders negotiate a valuation cap at which the SAFE converts. When the priced round (or any other triggering event) occurs and the valuation of the startup is higher than the valuation cap, the SAFE converts at the agreed upon capped value. However, if the valuation of the startup is lower than the cap, the SAFE then converts at the actual valuation, so investors end up owning more of the company–their investment now entitles them to a higher stake.

A post-money valuation simply means the total of the pre-money valuation of the company (or the valuation before any priced round was raised) and any new money raised, including via SAFEs.

SAFEs are meant to be simple. The typical language used in other contracts is not what you’ll find here. It’s part of the ‘handshake deals’ culture of the startup industry. As they say, things move fast and no one has time to wait for lawyers anymore.

But that does come with a cost: ambiguity.

From the contract:

“3e) To its knowledge, the Company (that’s the Company that’s receiving the investment) owns or possesses (or can obtain on commercially reasonable terms) sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, processes and other intellectual property rights necessary for its business as now conducted and as currently proposed to be conducted, without any conflict with, or infringement of the rights of, others”

This paragraph raises questions:

  • What are reasonable terms? This kind of language is not always helpful, because everyone has a different idea of what that means, especially when it comes down to costs that differ amongst jurisdictions. (For example, lawyer fees in the United States are usually perceived as not reasonable for most Latin American countries.)
  • Usually starts don’t have much. They often don’t have any registered intellectual property rights and founders don’t even know what that is.
  • For many software companies that can operate worldwide, is it possible to say that you won’t have any conflict with others in regards to intellectual property rights?
  • In one instance, I had a startup client that was named the same as a startup in Argentina. Can the founder represent that there is not going to be a conflict? Should the founder declare if they know that? Is the founder at fault if they stay silent? The SAFE is not clear on that and that could mean trouble.

Amendments to the SAFE

“Any provision of this Safe may be amended, waived or modified by written consent of the Company and either (i) the Investor or (ii) the majority-in-interest of all then-outstanding Safes with the same “Post-Money Valuation Cap” and “Discount Rate” as this Safe (and Safes lacking one or both of such terms will be considered to be the same with respect to such term(s)), provided thatwith respect to clause (ii): (A) the Purchase Amount may not be amended, waived or modified in this manner, (B) the consent of the Investor and each holder of such Safes must be solicited (even if not obtained), and (C) such amendment, waiver or modification treats all such holders in the same manner. “Majority-in-interest” refers to the holders of the applicable group of Safes whose Safes have a total Purchase Amount greater than 50% of the total Purchase Amount of all of such applicable group of Safes.”

This is an innovation they made into the 2018 version of the SAFE and basically makes it possible to modify the document without actually getting the consent of an investor.

It’s usually celebrated as something good, since it’s not always possible to get the signature of the investor. But I wouldn’t sign this or recommend anyone else do so.

This document can be changed without my consent if I sign it. Of course, the clause says that the consent must be solicited to every investor, but there’s no language regarding how or when this is happening.

Should a startup use the Post-Money SAFEs?

There is this narrative that the founder should not take time to review or negotiate the terms of the deals they are signing. “Just sign already” is the phrase, and say yes to any term sheet or deal the investor offers.

This is particularly the case for Latin American startups where the investor is usually way more powerful than the startup. The investor can act as if they are philanthropists giving money away to kids. It’s a common attitude. This is reflected in the latest version of the Y-Combinator’s SAFE.

With the current version of the document, the common stock of the company absorbs all dilution from any subsequent SAFE or convertible notes until an equity round. Thus, the SAFE holders don’t get diluted at all. That is not the industry standard, not even here in Latin America, where investors hold a lot of power over the startups.

It’s a little crazy. It’s a hard price to pay for the sake of cap table clarity.

Without getting into the whole dilution argument, which is very technical and not the purpose of this post, I would give a heads up to founders: the Y-Combinator’s SAFE and some of the versions that are publicly disseminated both in English and in Spanish or any other language should be reviewed by legal counsel before they are signed, or you probably won’t get a good deal. Unfortunately, getting a good deal takes time.


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