An investor makes a cash investment in a company, but gets company stock at a later date, in connection with a specific event. A safe is not a debt instrument, but is intended to be an alternative to convertible notes that is beneficial for both companies and investors. The safe was created by seed accelerator Y Combinator and has been adopted by early stage investors across the board. The following description has been adopted from Y Combinator.
Most start-ups need to raise money soon after formation in order to fund operations, and the safe can be a vehicle for investors to fund companies at that very early stage. Unlike the sale of equity in traditional priced rounds of financing, a company can issue a safe quickly and efficiently, without multiple documents and the necessity of a charter amendment. As a flexible, one-document security, without numerous terms to negotiate, the safe should save companies and investors money and time. The investor and the company agree on the valuation cap, mutually date and sign a safe and the investor sends the company the investment amount. After that, nothing happens until the occurrence of one of the specific events described in a safe. In the meantime, an outstanding safe would be referenced on the company’s cap table like any other convertible security (such as a warrant or an option).
Easier process, simple and standardized term-sheets readily available online
Cost effective, less resources required and legal fees
No maturity date, able to raise cash without setting a new deadline
Typically only used by experienced early stage investors