The Simple Agreement for Future Equity (“SAFE”) is an entrepreneur-friendly and simple mechanism for startups to obtain funding in early stages, such as seed financing rounds. As an agreement between an investor and a startup, a SAFE gives the investor the right to receive equity of the company on certain triggering events, e.g., a future equity financing round. It was introduced by the startup accelerator Y Combinator in late 20131 as an alternative to convertible loan agreements and has since then become popular in the U.S. and Canada2.
2. Early-Stage Investments in Germany
In Germany, SAFEs are not that commonly known or used. Instead, in the venture capital sector, convertible loan agreements continue to be predominant. Interestingly, they are also increasingly used as an investment structure option for private equity investors, particular in growth situations.3
The main difference between a SAFE and a convertible loan agreement is that a convertible loan agreement is essentially a loan with an interest rate and maturity date, which can be converted into equity. Under a convertible loan agreement, investors have, unless the terms otherwise provide for a forced conversion, the right to choose whether they want the loan to be paid back with interest or if they want to convert the loan with the accrued interest into equity of the company. In most cases, the investors choose to convert the convertible loan into equity because due to the qualified subordination clause of the convertible loan agreements, the loan repayment claim is quasi-equity.4
For the conversion into shares, the convertible loan agreement can provide for an agreed price-per-share, which requires a company valuation. The agreement can also provide for a discount on a future equity financing round, with the valuation of such a round setting the benchmark for the conversion price. As protection against an excessively high valuation, convertible loan agreements regularly provide for a cap on the conversion price. Discounts and caps are also regularly found in SAFEs.
3. Implementation using authorized capital
As mentioned above, SAFEs are not so common in Germany. It is not possible to implement the US SAFE concept one-to-one under German corporate law. However, there are workarounds which can achieve a similar effect.