Q: What is a SAFE investment, and could one benefit my company?
—Seeking Funding

A: Dear Seeking:
SAFE stands for “Simple Agreement for Future Equity,” and a SAFE investment is basically an agreement between an investor and your company that provides rights to the investor for future equity in your company.

In exchange for the money invested through the SAFE, the investor receives the right to purchase stock in a future equity round (when one occurs), subject to certain conditions set in advance in the SAFE. SAFEs were created as a simple replacement for convertible notes, and they are designed for startups seeking initial funding.

A SAFE makes sense when your company is likely to raise money in the future through an established valuation, but your company is in too early of a stage to be valued appropriately. A SAFE is a form of equity financing, and generally speaking, equity investment is only feasible when you have a clear plan for exiting your business, so your equity holders will be able to earn a return on their investment when your equity becomes saleable.

If you are not yet at the place where you have a clear strategy for exiting your business, you’ll likely be better off securing a loan to fund your business.

Consult with a Family Business Lawyer™ if you’re interested in funding your company with a SAFE, or if you’re looking to raise capital by selling equity in your company.