An Entrepreneur’s Guide to Safe Notes
Safe Notes were first created in 2013 by Y combinator, a Silicon Valley accelerator. Since then, they have become extremely popular with entrepreneurs all around the world. But what is a safe note? And what are the advantages of using one? Keep reading below to find out more:
What is a Safe note?
A safe note allows entrepreneurs and other business professionals to take on an investment that will transfer into equity in the future. If you need funds to start a business, a safe note might be the instrument you need.
Safe notes have increased in popularity over the last few years and are a vital early-stage fundraising tool for many entrepreneurs. In a similar way to convertible notes, safe notes will be converted into equity. However, safe notes are much simpler to understand and much more flexible.
A lawyer can help any business create a founder-friendly SAFE note. Look for a team of commercial lawyers and experts to tailor the documents to your unique needs and priorities.
How Does a Safe Note Work?
Lots of entrepreneurs ask themselves the question, “how does a safe note work?“. A Safe note allows investors to be issued shares in a future priced round. This means that the price of shares does not need to be determined at the time of the raise.
Under this agreement, the investing party will have the opportunity to convert their investment into equity when a trigger event occurs. This event must be pre-agreed between parties. In most cases, the pre-agreed trigger event is a priced equity round by the company.
What is a Safe Note Cap?
A safe note cap, otherwise known as a valuation cap, is one of the most important features of a safe note. The valuation cap determines the highest price that can be used to set the conversion price. Without a safe note cap, the safe note simply converts equity at the price of the business’s following round.
Valuation caps are investor-friendly for a reason. They are a good way to reward and incentivize investors who want to support your business and believe in your vision. However, while this may be true, it is important to remember that some investors may try and take advantage of these perks. This means that entrepreneurs need to be careful when negotiating with investors to make sure the right balance is agreed to between the risk taken and the incentives by the investors.
The Advantages of Safe Notes
The main advantage of using safe notes is that you can postpone the valuation of your business until a later date. This means that the number of shares your investors will receive will depend on the amount of money they have invested and the share price of the liquidation event or the priced equity round.
Some of the other advantages of safe note’s include:
- They are simple to use – research suggests that safe notes are easier to use than convertible notes.
- Flexibility – as there is no need for a valuation, safe notes give entrepreneurs a lot of flexibility.
- Negotiation – usually with a safe note, you will only need to negotiate the valuation cap.
If you are an entrepreneur looking to raise capital to grow or expand then a safe note might be a great option for you. SAFE or Simple Agreement for Future Equity is an increasingly popular instrument for fundraising particularly during the early days of a start-up. They are a concise and useful instrument to connect your business and your investors. Why not find out more about safe notes today?