What is this document?
A Simple Agreement for Future Equity (SAFE) is a binding contract between a company and an investor under which the investor provides capital upfront in exchange for the right to receive shares in the Company at a later date, typically when the Company next raises a larger round of funding, or on an exit event such as a sale of the business.
Unlike a traditional share subscription (where shares are issued immediately for a set price), a SAFE defers the issue of shares to a future event. The investor is not buying shares today; they are buying the right to receive shares later, at a price that rewards them for investing early.
Why is this important?
SAFEs are increasingly popular with early-stage companies because they allow founders to raise capital quickly and with fewer transaction costs than a full equity round.
There is no need to agree a formal company valuation at the time of investment (which can be difficult for early-stage enterprises), no interest accrues, and there is generally no repayment obligation — although there are some circumstances where the investor may receive cash later. The investor's return comes when the SAFE converts into shares at a future financing event.
For social enterprises, a SAFE provides a way to fund mission-critical activities at an early stage with less upfront complexity than a full subscription agreement and shareholders agreement. All while still giving the investor comfort that they are entitled to receive equity on terms that reward their early support.
How does the SAFE Note relate to the other Toolkit documents?
A SAFE is typically used at an earlier stage than the other Toolkit documents.
A SAFE converts into shares when a "Qualifying Financing" occurs — a fundraising event undertaken by the Company for the principal purpose of raising capital through the issue of Equity Securities. At that point, the SAFE investor receives shares alongside (or immediately prior to) the new investors in the priced round, at a lower price per share that reflects their earlier risk, and enters into a shareholders agreement.
The investment: what is the investor paying for?
The investor pays cash now, and is entitled to receive shares later when a triggering event occurs. Until that event, the investor does not hold any shares and has no shareholder rights.
Pricing mechanism
Key concept
The pricing mechanics determine how many shares the investor receives when the SAFE converts into equity. The core principle is simple: the investor generally receives a lower price per share than the new investors in the future round (meaning they receive more shares for the same investment amount), reflecting the risk of investing earlier.
How much better? That depends on two pricing tools — the Discount and the Valuation Cap — which parties agree at the outset. These can be used alone or in combination.
- Whether to use a Discount, a Valuation Cap, or both.
- What Discount percentage and/or Valuation Cap amount is appropriate given the Company's stage, sector, and growth trajectory.
- How multiple SAFEs (if more than one investor) interact and compound dilution for founders.
- The impact of the pricing mechanics on the Company's capital structure at conversion.
The two pricing tools: a high-level overview
The SAFE uses two tools (alone or in combination) to give the investor a better price:
(a) The Discount
The Discount Price is calculated as the lowest price per share paid by new investors in the Qualifying Financing (the QF Price), multiplied by (1 minus the Discount expressed as a decimal).
In simple terms: if new investors pay $1.00 per share and the SAFE has a 20% Discount, the SAFE investor pays only $0.80 per share, receiving more shares for the same amount of money.
The Discount gives the SAFE investor a fixed percentage "better deal" relative to whatever price the new round is priced at.
(b) The Post-Money Valuation Cap
If a Post-Money Valuation Cap is included in the Reference Schedule, the SAFE Price is calculated as the Post-Money Valuation Cap divided by the Fully Diluted share capital of the Company.
In simple terms: the Valuation Cap sets a ceiling on the effective company valuation at which the SAFE converts. If the Company's actual valuation at the next round turns out to be higher than the Valuation Cap, the investor still converts at the lower capped price, meaning they get more shares for the same money.
The Cap protects the investor against the scenario where the Company grows significantly in value between the SAFE investment and the next round.
How the tools interact
If both a Discount and a Valuation Cap are included, the Company must issue shares calculated as the higher of:
- the Purchase Amount divided by the Discount Price; or
- the Purchase Amount divided by the SAFE Price.
The investor always receives whichever formula produces more shares (the better outcome for the investor).
Using one tool only
Parties can choose to use only a Discount (no Valuation Cap), only a Valuation Cap (no Discount), or both.
If no Post-Money Valuation Cap is included, the SAFE Price simply equals the Discount Price, so only the Discount applies. If a Discount of 0% is specified, the Discount Price simply equals the QF Price, so only the Valuation Cap provides any benefit to the investor.
Worked example
Assumptions
- Purchase Amount: $100,000
- Discount: 20%
- Post-Money Valuation Cap: $2,000,000
- At the next round: the Company has 1,000,000 shares on a Fully Diluted basis
- New investors are paying $4.00 per share (implying a $4,000,000 valuation)
Discount formula
- Discount Price = $4.00 × (1 - 0.20) = $3.20 per share
- Shares = $100,000 ÷ $3.20 = 31,250 shares
Valuation Cap formula
- SAFE Price = $2,000,000 ÷ 1,000,000 = $2.00 per share
- Shares = $100,000 ÷ $2.00 = 50,000 shares
The worked example above is illustrative only. Under the deed, "Fully Diluted" includes the shares issued under this SAFE (and any other convertible securities), which adjusts the precise number of shares the investor receives on the Valuation Cap formula. Specific advice should be obtained on the conversion mechanics.
The QF Price
The QF Price is defined as the lowest price per Equity Security of the QF Shares issued in the Qualifying Financing, meaning if the Company issues shares at different prices to different investors in the same round, the SAFE investor's conversion price is based on the lowest price, giving the maximum benefit.
Qualifying Financing: when does the SAFE convert?
What is Qualifying Financing?
A Qualifying Financing means a bona fide fundraising event (or series of events) undertaken by the Company for the principal purpose of raising capital through the issue of Equity Securities, including any seed, series A or series B round of funding, which raises not less than the nominated amount in the template.
The minimum fundraising threshold
This is the minimum the Company must raise in the next round for it to trigger conversion of the SAFE. Its purpose is to prevent the SAFE converting on a trivial or informal capital raise that does not represent a genuine next-stage financing.
Automatic conversion
If a Qualifying Financing occurs, the Company must automatically issue QF Shares to the investor. No further election as to whether to convert is required, but the investor must first sign a deed of accession to the shareholders agreement (or if there is no shareholders agreement, enter into a shareholders agreement with the Company). Until shares are issued, the investor is not a shareholder and has no shareholder rights (including voting, dividend or participation rights). The investor's rights are limited to those set out in the SAFE.
The Company must within 3 Business Days after the issue send the investor a share certificate and enter the investor's name in the register of members.
What class of shares does the investor receive?
QF Shares means the shares of the most senior class issued by the Company in the Qualifying Financing. This means the investor receives the most senior class of shares issued in the round. Where the round issues only a single class of shares, this will be the same class as the new investors. If the Company issues ordinary shares, the investor gets ordinary shares. If it issues preference shares, the investor gets preference shares.
Exit event
What triggers an exit event?
An Exit Event occurs if, before the Termination Date, any of the following occurs:
- the sale of all, or substantially all, of the assets of the Company;
- the sale of all or substantially all the issued share capital of the Company; or
- any other event or series of events that has the effect of allowing a realisation of substantially all the shares in, or substantially all the assets of, the Company.
The investor's election
On an Exit Event, the investor may elect within 10 Business Days of notice from the Company either to:
- receive a cash payment equal to the Purchase Amount, the investor gets its money back, no more, no less. This is appropriate where the exit value is so low that the shares would be worth less than the original investment; or
- receive Ordinary Shares calculated using the same "higher of" formula (Exit Event Price or SAFE Price), the investor receives shares (issued immediately before the exit), which then participate in the sale. This is appropriate where the value of the shares exceeds the original investment.
If the investor makes no election within 10 Business Days of notice of the Exit Event, it will be deemed to have elected to receive Ordinary Shares.
How does the equity calculation work on an Exit Event?
The same logic applies as on a Qualifying Financing. The investor receives the higher of:
- Purchase Amount ÷ the Exit Event Price (the implied price per share based on the total exit consideration); or
- Purchase Amount ÷ the SAFE Price (the Valuation Cap formula).
The investor receives whichever produces more shares.
Insolvency and dissolution: if the Company fails
What happens on a Dissolution Event?
If there is a Dissolution Event before the Termination Date, the investor will automatically be entitled (subject to the liquidation priority below) to receive a portion of any amounts available for distribution equal to the Purchase Amount, payable immediately prior to the consummation of the Dissolution Event.
Liquidation priority
Creditors get paid first, then SAFE holders (equally among themselves), then shareholders. A SAFE is not debt, it does not rank alongside creditors, but it does rank ahead of existing shareholders.
The practical implication is that in an insolvency scenario, the investor may receive less than the Purchase Amount (or nothing) if the Company's assets are insufficient to satisfy creditors and SAFE holders. A SAFE is not a guaranteed return of capital.
Compliance with law
The regulatory safety valve
If issuing shares would trigger a prospectus obligation or takeover regulation, the Company is excused from issuing shares but must return the investor's money.
Investor's warranty: sophisticated or professional investor
The investor warrants that it is a person to whom an offer of shares may be made without disclosure under certain sections of the Corporations Act. This is important because, under Australian law, a company issuing shares must generally provide a disclosure document (such as a prospectus). This is often a significant cost and compliance exercise. However, this requirement does not apply where an exemption is available.
If the investor does not fall within an applicable exemption, the Company may be required to prepare a disclosure document before issuing shares.
What does this agreement deliberately not cover?
This template is designed as a straightforward SAFE for an unlisted social enterprise. To keep it accessible, the following matters are not addressed:
- Most Favoured Nation (MFN) clause: giving the investor the right to adopt the terms of any later SAFE issued on better terms.
- Pro rata rights: a right for the investor to participate in the Qualifying Financing round on the same terms as new investors (in addition to conversion shares).
- Board observer rights: some SAFE investors negotiate the right to attend board meetings as an observer prior to conversion.
- Maturity / long-stop date: some SAFEs include a date by which, if no triggering event has occurred, the SAFE either converts automatically or the Purchase Amount becomes repayable. This template does not include a long-stop; the SAFE remains on foot indefinitely until a triggering event occurs.
- Side letter: where additional rights (such as enhanced information rights or impact reporting) are agreed outside the SAFE itself.
These are intentional design choices. Users who require any of these features should seek legal advice.
Download the template
The SAFE Note template is available to download below. Review with your legal adviser before use.