A Beginner’s Guide To SAFEs: Understanding The Basics

What Is a SAFE?

If you're just getting started with fundraising for your Web3 startup, you’ve probably heard the term SAFE thrown around a lot. SAFE stands for Simple Agreement for Future Equity. In basic terms, it's a tool that allows investors to give your company money now, in exchange for a promise that they will receive equity (shares) later on when your company grows and reaches certain milestones.

Think of a SAFE as a "promise of future shares." It's a fast and easy way for startups to raise money without having to issue shares immediately, which can be a costly and time-consuming process.

In Web3, SAFEs often come with an extra benefit for investors—a token warrant. This means that, in addition to shares in your company, investors might also receive cryptocurrency tokens as part of the deal. Tokens can represent anything from ownership in a decentralized project to participation in a network.

Why Are SAFEs So Popular?

SAFEs became popular because they simplify the process of raising money for early-stage startups. They were first introduced by Y-Combinator, a well-known startup accelerator, as a way for startups to delay the complex process of creating shares and entering into long-term agreements with investors.

For startups, issuing shares and signing complex shareholder agreements can be expensive and complicated. By using a SAFE, founders can delay all of this until the company is further along, when they’ve raised more money or grown their business. When certain milestones are reached, the SAFE "converts" into actual shares for the investor, usually when the company raises its next round of funding.

How SAFEs Work in Web3

In the Web3 space, SAFEs are a little different. Instead of only converting into shares of the company, many SAFEs are tied to token warrants. This means that, in addition to shares, investors can receive cryptocurrency tokens when the SAFE converts. These tokens could represent voting rights in a decentralized network, participation in a token economy, or other benefits depending on the project.

Web3 startups often issue SAFEs to investors who believe in the future value of their tokens. For example, if you're building a decentralized finance (DeFi) project, investors might get both equity in your company and tokens that allow them to participate in your project.

Key Parts of a SAFE

Now that you know the basics, let's break down some key parts of a SAFE:

1. Purchase Amount: This is simply the amount of money the investor is putting into your company. For example, if an investor gives you $100,000, that’s their purchase amount.
2. Post-Money Valuation Cap: This is a cap on how much your company is valued at when the SAFE converts. If the Post-Money Valuation Cap is set at $10 million, the investor will get shares as if the company is valued at no more than $10 million, even if it grows beyond that.
3. Conversion Events: A SAFE typically converts into shares when one of three events happens
   • Equity Financing: This is when your company raises its next round of funding.
   • Liquidity Event: If your company is bought or goes public (IPO), the SAFE converts.
   • Dissolution Event: If the company shuts down, the investor might get their money back (if there’s any left).

Why Use SAFEs for Web3 Fundraising?

Using SAFEs for Web3 fundraising has several advantages:

• Speed: You can raise money quickly without having to issue shares immediately.
• Flexibility: SAFEs are designed to delay the need for complex legal work, saving time and money.
• Token Integration: In Web3, SAFEs often come with token warrants, giving investors additional incentives to invest.

SAFEs have become a trusted and simple way for early-stage Web3 companies to bring on investors without overcomplicating the process.

Ready to raise funds for your Web3 project? Generate your own term sheet using our free term sheet generator here.