To address these issues, Y Combinator introduced the idea of safe (Simple Agreement for Future Equity). A safe is an investment contract that not only simplifies the conditions for new startups, but also helps them achieve slightly better terms than with traditional financing opportunities. The start-up (or another company) and the investor enter into an agreement. They negotiate things like: a safe (simple agreement on future equity) is an agreement between an investor and a company that grants the investor rights to the company`s future equity, similar to a share warrant, except to determine a price per share determined at the time of the initial investment. The SAFE investor receives future shares in the event of an investment price cycle or liquidity event. SAFEs are supposed to offer start-ups a simpler mechanism to apply for upfront financing than convertible bonds. SAFS are instruments that function as an arrest warrant. In return for capital, the SAFEs recall the agreement reached with the investor that, after a subsequent cycle of equity financing, after a change of control over the company or the IPO of a company, the amount of the SAFE investment will be converted into equity. Although the function is similar, FAS differs from convertible bonds in that the amount invested under a SAFE is not a debt incurred or requires a monthly payment, and has no maturity date. SAFCes are not direct stakes in the company, but a promise that the amount of the investment will be converted into equity in the future.
This aspect of FAS puts investors at a fundamental concern. Investors are not protected under public corporate or federal securities law, as would be the case with the issuance of equity, nor can they seek redress without fraud or other contractual remedies if SAFE is not converted. Since convertible notes are a form of debt, they have a number of strict obligations. They have interest rates and maturities. After the maturity, the start-up must repay the money to interest or convert its value into equity in the company. In addition, a SAFE may be on hold indefinitely, which would prevent the investor from making a profit from the investment. Since FASCs should only be converted in the event of specific events, an investor should analyze the risk that events will not occur in light of the company`s circumstances. If an entity generates enough capital not to require additional capital financing cycles, the amount invested under SAFE can never be converted into equity.