When it comes to raising capital for a startup, founders have a few different options available to them. Two popular choices are SAFT (Simple Agreement for Future Tokens) and SAFE (Simple Agreement for Future Equity). Both of these agreements are designed to provide early-stage startups with the funding they need to get off the ground, but they work in very different ways. In this blog post, we'll take a closer look at SAFT and SAFE agreements and help you understand which one may be the right choice for your startup.
SAFT and SAFE agreements are like two sides of the same coin - both are designed to provide early-stage startups with the funding they need to grow, but they work in different ways.
What is Simple Agreement for Future Equity (SAFE)?
SAFE stands for Simple Agreement for Future Equity. It is a type of investment agreement that is used by early-stage startups to raise capital from investors. With a SAFE, investors provide funding to the startup in exchange for the promise of future equity in the company. The equity will be issued to the investors at a later date, usually when the startup has achieved certain milestones or when it has completed a future financing round.
The SAFE is a type of convertible instrument, which means that it converts into equity at a later date. The conversion typically happens when the company raises more funding in the future at a higher valuation, also known as a "qualified financing round".
The SAFE is a relatively simple and flexible instrument and has gained popularity among startups as an alternative to traditional convertible notes. It was introduced by Y Combinator in 2013 and has been widely adopted by startups and early-stage investors since then.
Pros of SAFE:
Simple and Flexible: SAFEs are relatively simple and flexible agreements that can be easily understood by both startups and investors.
Cost-effective: SAFEs do not require the same level of legal and accounting fees as traditional convertible notes or equity rounds.
No Dilution: SAFEs do not dilute the equity of existing shareholders, as the equity is issued at a later date.
Faster fundraising process: SAFEs can be closed quickly, which can be beneficial for startups that need to raise capital quickly.
No Securities Laws Compliance: SAFEs are not registered with the SEC and do not need to comply with securities laws.
Cons of SAFE:
Uncertainty: SAFEs do not provide investors with any immediate ownership in the company.
No voting rights: SAFE holders are not considered stockholders, which means that they do not have voting rights or other rights associated with equity ownership.
Risky for investors: SAFE holders are taking on more risk than traditional equity investors, as they are not guaranteed any ownership in the company.
No protection for early investors: SAFE holders may not receive favorable terms when the equity is issued, which can be detrimental for early investors.
No liquidation preference: SAFE holders do not have any rights to the assets of the company in the event of a liquidation.
In summary, SAFEs are a useful tool for early-stage startups to raise capital, but they come with certain risks and limitations.
What is Simple Agreement for Future Tokens (SAFT)?
SAFT stands for Simple Agreement for Future Tokens. It is a type of investment agreement that is used by blockchain and cryptocurrency startups to raise capital from investors. With a SAFT, investors provide funding to the startup in exchange for the promise of future tokens, which are digital assets that represent ownership in the company. The tokens will be issued to investors once the company has completed the development of its blockchain or cryptocurrency platform.
A SAFT is essentially a pre-sale agreement for tokens, which allows startups to raise money before the tokens are issued and before the platform is fully functional. The SAFT is a legally binding agreement that outlines the terms and conditions of the token sale, including the number of tokens to be issued, the price of the tokens, and the rights and obligations of the parties involved.
The SAFT is a way for blockchain or cryptocurrency startups to raise money from investors before the tokens are issued. The investors are buying the right to receive tokens in the future, once the company has completed the development of its blockchain or cryptocurrency platform. The SAFT is a way for startups to raise money before the tokens are issued and before the platform is fully functional.
The main benefit of using SAFT is that it allows startups to raise money from investors before the tokens are issued, and before the platform is fully functional. Additionally, SAFTs can provide a way for startups to raise capital in a compliant manner, which can be beneficial for startups that are looking to avoid regulatory issues.
It's important to note that SAFTs are considered securities by the SEC, and therefore have to comply with securities laws. This can make the process of issuing a SAFT more complex and costly for the startups. So, which agreement is right for your startup?
The answer to that question depends on a number of factors, including the stage of your startup, the type of business you are in, and your fundraising goals.
If your startup is focused on creating a blockchain or cryptocurrency platform, then a SAFT may be the better choice. This is because tokens are a natural fit for this type of business, and a SAFT allows you to raise money before the tokens are issued.
If your startup is focused on a more traditional business model, then a SAFE may be the better choice. This is because SAFEs are often used by startups that are not yet ready to issue equity or are not yet profitable.
Ultimately, the choice between a SAFT and a SAFE will depend on your individual circumstances and the needs of your startup. It's important to consult with a lawyer and a financial advisor to help you make an informed decision.
Here's a comparative table that illustrates some of the key differences between SAFE and SAFT:
Features | Simple Agreement for Future Equity (SAFE) | Simple Agreement for Future Tokens (SAFT) |
Type of investment | Future equity | Future tokens |
Issued | Later, usually at a later financing round | Once the platform is fully functional |
Issued when | Achieved certain milestones or future financing round | Platform is fully functional |
Investor's rights | Right to purchase equity in the future | Right to receive tokens in the future |
Dilution | No dilution to existing shareholders | No dilution to existing shareholders |
Compliance | Not registered with the SEC | SEC compliance is required |
Suitable for | Traditional Business Models | Blockchain or Cryptocurrency Platforms |
Risk for Investors | Higher than traditional equity investors | Higher than traditional equity investors |
In conclusion, SAFT and SAFE agreements are two popular options for early-stage startups to raise capital. While SAFT is a pre-sale agreement for tokens, SAFE is an agreement that allows investors to provide funding in exchange for the promise of future equity. It's important to consult with a lawyer and a financial advisor to help you make an informed decision based on your startup stage, business type and fundraising goals.