SAFE Deal Structure Gains Momentum

  • JJ Hornblass
  • April 8, 2016
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canstockphoto8468439Back in the days of the internet boom, it was straight up equity, then it became convertible notes.

Now, the SAFE deal structure is gaining momentum as the structure of choice for certain investments in fintech startups. This after Y-Combinator, the incubator, posted details on its SAFE agreements last February.

SAFE, which Y-Combinator first started using in 2014, stands for simple agreement for future equity. A SAFE is often used in the start-up context and accomplishes the same general goal as a convertible note without the obligation for repayment, since convertible notes generally morph into debt.

To offer a scenario, let’s say an accelerator wants to gain equity in one of its startups. It is in both the accelerator’s and the startup’s best interests that the equity should be distributed only if the startup rocks up to a much greater valuation then when the startup joins the accelerator. The SAFE would have the equity distributed upon a valuation over a certain level, say, $20 million. But if the startup does not achieve that valuation, there is no equity distribution and there is no debt created, as in a convertible note.

Here’s the No. 1 reason why Y-Combinator has moved to SAFEs:

Unlike a convertible note, a SAFE is not a debt instrument. Debt instruments have maturity dates, are typically subject to certain regulations, create the threat of insolvency, and can include security interests and sometimes subordination agreements, all of which can have unintended negative consequences for startups.

It should be noted, and as implied above, the SAFE structure has been around for a while, but the Y-Combinator information has some deal attorneys more jazzed about it again.

Some observers have noted that certain investor protections are not present in the Y-Combinator model. For example, information rights and the right to convert to equity earlier under certain circumstances are excluded. Deal attorneys say those are conditions that should be included in a SAFE.

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JJ started the first iteration of Bank Innovation back in 2007, and has been working on it ever since. He also serves as President & Chief Executive Officer of Royal Media, Bank Innovation’s parent. He founded Royal in 1995 and oversees all aspects of the New York-based diversified media company. Prior to forming Royal, JJ was on the editorial staff of American Banker, the daily newspaper, and worked as an editor of a business magazine in Hong Kong. As a reporter and editor, he has won journalism awards from the National Press Foundation, Newsletter & Electronic Publishers Foundation, and the Reader’s Digest Foundation. He has a BS in Economics from Yeshiva University and a Master’s from the Columbia University Graduate School of Journalism. He was also a Fellow at the University of Wisconsin-Madison Graduate School of Banking. He lives in New York City with his wife, two daughters, and son. He counts among his accomplishments one New York City Marathon, two New York City Triathlons and the 2010 Father’s Day 5K, the first race he ever ran with his daughters. He can be reached at or 212-564-8972.

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