Scaling a private company is an exciting and challenging journey, and early-stage founders are faced with the task of raising funds to grow and scale their business. Finding the ideal fundraising strategy might be challenging given the abundance of options available. But there is one solution that stands out for its ease and flexibility: the Simple Agreement for Future Equity (SAFE).
A SAFE is a type of convertible debt instrument that allows private companies to raise capital from investors in exchange for future equity. SAFEs represent an alternative to a traditional equity financing round.
A SAFE converts into shares when the company undergoes a formal equity financing, at which point the company’s valuation is determined. In simple terms, a SAFE allows a company to get capital fast, while delaying the act of granting shares until their next priced round — usually a Series A.
Early-stage companies usually opt for SAFEs because 1.) it can be difficult to determine your valuation before you’ve progressed further through your growth journey and 2.) they’re a lot less legally complex — and thus cheaper to conduct — than financing rounds.
There are two main types of SAFEs: a pre-money SAFE and post-money SAFE. Whichever SAFE a founder chooses will have an effect on how they get diluted in their ownership of the company.
In this guide, we’ll explain the differences to help you decide which is the better choice for your growing company. We’ll also introduce Fidelity’s equity management platform, which helps private companies streamline the process of granting SAFEs and keep a sparkling cap table throughout their financing journey.
What is a pre-money SAFE?
A pre-money SAFE is a promise from an investor to provide capital in exchange for the right to purchase shares at a future date — and the ownership associated with the SAFE won’t be clear until after your first priced round.
Private companies often raise SAFEs from multiple investors. A pre-money SAFE for one investor doesn’t take into account the terms in the SAFEs to other investors. For investors, this causes uncertainty around what percentage ownership of the company they will come to have.
Let’s say you’re raising a pre-money SAFE round and Investor X wants to be a part of it. Investor X provides capital, but she can’t actually know the percentage of the company that she owns until your company conducts its first priced financing. At that point, your valuation is established and SAFEs convert into shares.
It's only then that the math will be done to make it clear how the SAFEs will impact each other and what the dilution will be for everyone involved. In the end, all parties will know how much of the company they own.
What is a post-money SAFE?
A post-money SAFE, on the other hand, provides investors with a clearer picture of their ownership and dilution. Rather than a “wait and see approach”, you’re effectively locking in your investor's ownership before you raise another round.
Most post-money SAFEs include a valuation cap, which limits the price at which a SAFE can eventually convert to equity.
Let’s say Investor Y gives you a $2 million post-money SAFE with a $10 million valuation cap. Investor Y has essentially locked in a 20% stake in the company when their SAFEs convert to shares at the beginning of the Series A.
Just like Investor X, they’ll eventually get diluted by the Series A. Even if both investors ended with the same percentage of ownership, Investor Y had more certainty in the 12-18 months between issuing the SAFE and reaching the Series A.
Pre-Money vs Post-Money SAFE: Key Considerations
You’re probably thinking to yourself: “a post-money SAFE provides more certainty for everyone involved.”
Partially right! Post-money SAFEs paint a clearer, up-front picture of ownership for investors and founders. This means that negotiating with investors is easier and quicker because everyone understands what they’re getting into.
However, don’t forget to consider one key factor: dilution. This often makes the post-money SAFE favor the investor, instead of the company.
Post-money SAFEs establish fixed ownership percentages. That’s to say: when your Series A triggers your post-money SAFEs to convert into shares, the investors will keep their equity percentages as-is. None of the SAFE investors will dilute each other’s ownership.
Thus, before your Series A begins, the only ownership pool that’s getting diluted is the company’s, which usually includes the founders and early employees. On the other hand, when dealing with a pre-money SAFE, everyone’s ownership gets diluted.
The choice between pre-money or post-money SAFE ultimately depends on your company's specific situation and the objectives of founders and investors. Therefore, founders should weigh the pros and cons of each option and consult with experienced legal and financial advisors before making a decision.
Fidelity puts the "simple” in SAFE
No matter which SAFE you prefer, it’s crucial that you do your homework before making any final agreements.
You can never be too prepared when it comes to managing your equity. Fidelity offers private companies a comprehensive equity management platform that combines corporate governance, financing tools, and an automated cap table all in one easy-to-use hub.
Whether you choose a pre-money or post-money SAFE, Fidelity’s platform can help you create a unique SAFE for each of your investors. You can even generate a board approval document to approve the financing if necessary.
For growing private companies, time is money. Fidelity helps you to simplify the process of raising money without grinding your business to a halt.
Learn how Fidelity’s all-in-one equity management platform can help your private company secure capital more efficiently.
Fidelity does not provide legal or tax advice.1088187.1.0