Safe Financing Documents
The safe (simple agreement for future equity) is intended to replace convertible notes in most cases, and we think it addresses many of the problems with convertible notes while preserving their flexibility.
In addition to being simpler and clearer, we intend the safe to remain fair to both investors and founders. During its development the safe was positively reviewed by many of the top startup investors. We believe it's a positive evolution of the convertible note and hope the startup community finds it an easier way to accomplish the same goals.
Features of a safe:
Unlike a convertible note, a safe is not a debt instrument. Debt instruments have maturity dates, are typically subject to certain regulations, create the threat of insolvency, and can include security interests and sometimes subordination agreements, all of which can have unintended negative consequences for startups.
Because the money invested in a startup via a safe is not a loan, it will not accrue interest. This is particularly beneficial for startups, but also better embodies the intention of investors, who never meant to be lenders in the first place.
As a flexible, one-document security without numerous terms to negotiate, a safe should save startups and investors money in legal fees and reduce the time spent negotiating the terms of the investment. Startups and investors will usually only have to negotiate one item: the valuation cap. Because a safe has no expiration or maturity date, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like.
A safe still allows for high resolution fundraising. Startups can close with investors as soon as both parties are ready, instead of trying to coordinate a single close with all investors simultaneously.
There are four versions of safe, corresponding to the four types of convertible note:
- Safe Primer
- Safe: Cap, no Discount
- Safe: Discount, no Cap
- Safe: Cap and Discount
- Safe: MFN, no Cap, no Discount
While a safe may not be suitable for all situations, the terms are intended to be fairly neutral. So while we would of course advise both parties using a safe to have their lawyers look at them, we believe a safe provides a starting point that we hope can be used in many situations without too many modifications. Needless to say, YC does not assume any responsibility for any consequence of using a safe or any other document found on our website.
When Y Combinator startups make their first sales, we provide them with a sales template to make the legal part easy. In 2015, Y Combinator open sourced its sales template for the benefit of all startups.
The sales template here is specially tailored for software-as-a-service (SaaS) startups – i.e. companies who charge for cloud software on a subscription basis. You should consider YC's template as a starting point and customize it to meet your needs. We've highlighted the areas that in our experience are most likely to vary startup to startup.
Special thanks to James Riley at Goodwin Proctor for helping us draft this. Needless to say, YC & Goodwin Procter do not assume any responsibility for any consequence of using these documents.