What is a SAFE Note?

Whether you are an entrepreneur or a startup founder, you're probably already aware of SAFE note investments and realise that they offer a quick and effective way of raising funding.

However, not everyone understands the intricacies of how SAFE note investments work and why they are such a beneficial tool.

In this blog, we will explore everything you need to know about these popular financial agreements, including the pros and cons they offer for both startup founders and investors.

SAFE notes explained

Standing for 'simple agreement for future equity', a SAFE note investment is an agreement used by startups to raise seed capital.

Created in 2013 by US-based incubator Y Combinator, it is a simple convertible form of security that allows investors to purchase shares at a future price.

Easy to issue, they give startup founders access to funds very quickly, and this is one of the main reasons why they have experienced a boom in popularity.

In fact, the majority of angel, pre-seed and seed rounds are now done through SAFE notes. Designed to be founder-friendly, their streamlined and simplified process makes them ideal for startups that are looking for a hassle-free and affordable way to raise capital.

For Hub71, the MFN starts on the date of the acceptance from the startup.

The difference between SAFE notes and convertible notes

SAFE notes are a specific type of convertible note.

To put it simply, all convertible notes are essentially an 'I owe you' that is issued to a founder by the startup, and they offer investors the option of gaining future equity in exchange for present-day cash.

Pros and cons of SAFE notes

As with all business decisions, it's important to consider the pros and cons of SAFE note investments before you commit to using one.

Some of the main advantages of using a SAFE note vs any other form of convertible note include:

• No compulsory debt
  Unlike other forms of financing, SAFE notes do not necessarily burden startup founders with high levels of debt, interest rates, or loans that must be paid back. However, it's important to note that the stipulation of each SAFE note is down to each individual founder and investor, and so the terms and conditions of each one can vary.
  
  
• No fixed timeline
  Another major benefit is that traditional SAFE notes do not necessarily have a maturity date.
  
  In cases where there is no maturity date, startups that don't complete an equity funding round or a qualified financing round can relax in the knowledge that there is no obligation for them to start repaying their investors. In fact, in some instances, SAFE investments are never repaid, and the investor and founder instead come to a different arrangement.
  
  However, it's also important to note that some investors do choose to add an 18-to-24-month maturity date to their SAFE notes, and that not all SAFE notes are maturity date free.
  
  
• Simple and straightforward processes
  Generally, alternative types of convertible note are much more complicated than SAFE notes are. Other convertible notes require a lot more paperwork, and they come with many terms, conditions, and provisions that can be difficult to comprehend for first-time founders. On the other hand, SAFE notes are straightforward and easy to understand.
  
  
• Investor-friendly terms
  SAFE notes allow investors to buy equity in a startup at a future date when the startup has potentially completed many rounds of fundraising. This means that investors might end up with even bigger benefits than they initially thought.
  
  

Drawbacks of using SAFE note investments

Despite their many advantages, SAFE note investments also come with a few disadvantages.

Some of the main ones to consider include:

• Requirements for start ups
  To use SAFE note investments during negotiations, a business must first be officially incorporated. This means that limited liability companies are required to go through additional procedures to restructure and become incorporated, all before they can begin the process of negotiating and raising funding.
  
  
• Potential for excessive dilution
  When SAFE notes are eventually converted, some founders may find that their equity has been significantly diluted. This is especially common in cases where multiple fundraising rounds have been issued.
  
  
• Potential conflicts with investors
  SAFE notes can come with various different terms and conditions, and this may cause conflicts and disagreements during exit events or conversion scenarios. It can also lead to uncertainty and complications during acquisition or down-round scenarios.
  
  

Do your research

As you can see, although SAFE note investments are a relatively simple and versatile tool that offer many tempting advantages, not everything about them is clear and one dimensional.

There are still some complexities and potential drawbacks to SAFE notes that must be carefully considered by every startup founder and entrepreneur, and it's down to you to balance the pros and cons in the context of your specific situation, and come to an informed decision that best suits your needs and requirements.

What we offer at Hub71

Hub71 uses SAFE Note that is uncapped, no discount, and a future looking MFN (Most Favoured Nation) clause that grants startups AED 250,000 in cash in exchange for equity.