SAFE Round Basics

By: Alyssa Ziegenhorn

In the last few years, SAFEs have become the default method of early-stage fundraising – in Q2 of 2024, 88% of all pre-seed deals recorded by Carta were SAFEs. So what is a SAFE? How do you conduct a SAFE round? What are the terms? Are any securities filings required? Let’s walk through the process of holding a SAFE fundraising round for your company.

1. The Basics. “SAFE” stands for Simple Agreement for Future Equity. An investor gives money to the company, but they do not receive any shares (yet). Instead, the SAFE guarantees that their investment amount will convert into shares during the company's first fixed-price fundraising round (when there is a set valuation and price per share for investors to buy in at). Usually, SAFE investors receive a reduced price per share for investing early. 

2. Board Authorization. First, the Board of Directors authorizes the SAFE round, including the template SAFE that is going to be used, and the valuation cap and/or discount rate. The valuation cap and discount rate are the mechanisms which provide value to investors in exchange for the higher risk of investing in an early stage company.

3. Discount Rate. If a SAFE investor gets a discount rate, that means they will pay less than new investors in the priced round when their investment converts. For example: 

• The investor invests $100,000 via a SAFE with an 80% discount rate. When their investment converts, they only pay 80% of the price per share new investors pay – effectively a 20% discount.
• If the company has 10,000,000 shares in the priced round and the valuation is $10,000,000, an investor purchasing shares in the priced round would pay $1.00/share. 
• The SAFE investor pays 80% of that price, so they would pay $1.00 x 0.80 per share, or $0.80/share. 
• Their $100,000 investment would then immediately convert into 125,000 shares, instead of the 100,000 shares a new investor would get for the same amount of money. 

4. Valuation Cap. If the SAFE instead includes a valuation cap, it creates a ceiling on the price per share the investor will receive during the priced round. For example:

• Investor invests $100,000 via a SAFE with a $5,000,000 valuation cap. This means the highest price per share they will pay is $5,000,000 divided by the company's total issued shares at the time of the priced round. 
• If the company has 10,000,000 shares in the priced round with a valuation of $10,000,000, new investors in the priced round pay $1.00/share. 
• Because investor's valuation cap is $5,000,000, the highest price per share they will pay is $0.50 ($5,000,000 / 10,000,000 shares = $0.50). The SAFE investor's $100,000 will buy them 200,000 shares, whereas a new investor in the price round would only get 100,000 shares for $100,000. 

**Don't get too hung up on the specific numbers here - these are just examples to help illustrate the concepts.**

You can offer either a discount rate, valuation rate, or both – in that situation investors receive whichever price is lower during the priced round.

5. Round amount/length. Some companies choose a set amount of money they are looking to raise, after which the round will close. Others don't have a set amount, and instead see how many SAFEs they can raise in a set amount of time. If the company doesn’t have a fixed amount it wants to raise, it can instead set a time limit for the round (one year is common).  It is good to have a fixed end point because you have to make certain securities filings related to the round, and having an end point makes it easier. 

6. Securities filings. You must file Form D with the SEC within 15 days after receiving the first investment capital. Form D is a very abbreviated securities filing that is allowed in certain circumstances which allows small fundraising rounds to be registered without going through the whole securities registration and disclosure process. Form D is then filed in any states where the company’s investors reside. Form D filing is free with the SEC, while most state filings have a fee associated. Usually the filing cost is around $300 - $600, but it varies depending on which states are involved. These filings are time sensitive and most are supposed to be filed within 15 days of signing! Because of this, it’s ideal to execute all the SAFEs around the same time. When you have multiple investors, try to line your investors up and prepare all documentation, then have everyone sign. This saves time and money and avoids any late filing fees. 

7. Accredited Investors. To take advantage of the Form D exemption, your investors must be what's known as "accredited investors". In the SEC context, this means they must meet at least one of the following requirements: (1) they have a net worth over $1,000,000, excluding primary residence (2) they have income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year, (3) they are a licensed investment professional, or (4) they are directors or officers of the company offering the investment. The time and cost involved in meeting the requirements if everyone is not an accredited investor mean that it usually doesn't make financial sense to accept an investment from a non-accredited investor unless it is a significant amount (over $100,000). 

Every financing round is different with its own challenges and strategy. If you would like to have a complimentary initial consultation to discuss how to best navigate the potential challenges of your round, please contact us at info@bendlawoffice.com or (415) 633-6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal or tax advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.