SAFE (Simple Agreement for Future Equity)

The SAFE (Simple Agreement for Future Equity) is an investment agreement developed by Y Combinator in 2013 to speed up early-stage investment. The investor pays money today but does not receive shares immediately. When the company later holds a funding round or is sold, the investor’s money converts into shares.

Key Elements

• Valuation cap: The maximum valuation applied on conversion,
• Conversion discount: A discount on the share price of the next round,
• Conversion triggers: A qualified funding round, sale or liquidation of the company,
• Most favoured nation (MFN): If a later SAFE is issued on better terms, the first investor also benefits from them.

A SAFE has no interest or maturity. This distinguishes it from a convertible note.

Structuring under Turkish Law

Under Turkish law, issuing shares to an investor generally requires a capital increase, which needs a general assembly resolution and registration. The company alone cannot guarantee this outcome simply by promising to issue shares in the future. In Turkey, a SAFE is therefore usually structured with the following elements:

• The amount paid is recorded as the investor’s receivable from the company until conversion; on conversion, the receivable is added to share capital. The existence and value of the receivable are confirmed by an accountant’s report.
• Existing shareholders undertake to vote for the capital increase at conversion and not to exercise their pre-emptive rights.
• Penalties and repayment are provided for breach of these undertakings.

Using a direct translation of the US standard forms causes problems in practice, especially at conversion. For licensed angel investors, it should also be considered that the tax deduction depends on the acquisition of shares. Every SAFE should be tracked on a fully diluted basis in the cap table.