Selecting An Appropriate SAFE For Your Financing

Assuming that a startup company and an investor are comfortable with the recently formulated Simple Agreement for Future Equity ("SAFE") as the investment vehicle to finance the startup company's early operations, the parties are then faced with the question of which version of SAFE is appropriate for the investment. Fortunately, the possible list of answers should be familiar and revolve around concepts identical to those used in convertible note financings: valuation caps, discounts, most-favored nation provisions, and combinations thereof.

SAFE with a Valuation Cap

The "standard" SAFE contains solely a valuation cap, with no discount rate applied to the investment. This means that at the time of the next applicable round of equity financing, the investors will be entitled only to the number of shares of preferred stock calculated with the valuation limitation and not a higher pre-money valuation. However, it is important to note that because the preferred