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+---
+title: "What is a SAFE Note?"
+author: ethan@clausehound.com
+tags: ["SAFE"]
+date: 2021-10-04
+description: "This article provides a detailed overview of a SAFE Agreement, as well as how to initiate fundraising for your early startup."
+---
+
+#### What is a SAFE Agreement?
+
+A Simple Agreement for Future Equity (SAFE) is used between a company and an investor. It allows startups to reduce the complexity and length of negotiations
+with seed-stage investors when raising capital. A SAFE functions like a convertible note, however is not a debt instrument. Rather, a SAFE is a contractual right
+to future equity. 
+
+Investors invest their money into a company using a SAFE. In exchange, the investor receives a right to purchase stock in a future equity round, subject to
+certain conditions set beforehand in the SAFE.
+
+#### Initiating a Friends & Family Fundraise
+
+It can be challenging for an early-stage company to persuade formal investors to contribute to the first round of funding. As a result, it is common for startups
+in their early stages to leverage their existing relationships. This phase of fundraising is called the Friends and Family round.
+
+To start, **consider the valuation of your company**. This can be difficult because at this early stage, startups are likely not generating any revenue. Due to
+the lack of revenue, it is difficult to project into the future and provide an accurate valuation of the company. There are agencies that can provide companies
+with a pre-seed valuation. This approach can add legitimacy to a company’s valuation since it will not be self-proclaimed. 
+
+Second, ##determine how much money you are needing to raise##. When initiating a friends and family round, note that the purpose is to kick-start your company.
+As such, do not estimate the maximum amount of funding you can generate. Rather, think strategically. For example, develop a six-month plan and determine how
+much it will cost to buy what you need (ex. inventory, assets, financing for early employees). When you develop a plan like this, it can be easier to request
+additional funding if the business is progressing according to the plan. 
+
+Third, **build a business plan**. Develop concepts and define goals that will communicate a clear path for your first six to twelve months. Detail how you plan
+to utilize the initial funds and state any risks involved. In addition, you can compare how your business differs from competitors.
+
+Fourth, **make the pitch**. You can produce a PowerPoint or similar presentation that will clearly communicate your vision, how you are going to achieve your
+goals, and how you will measure the progress at each stage along the way.
+
+In a friends and family round, there are three common ways that you can receive funding. The first is a loan (a planned repayment), the second is a gift (no
+requirement to pay back the money), and the third is equity (contributors become investors and later shareholders). This article will focus on the equity option
+that is governed by a **Simple Agreement for Future Equity** (SAFE).
+
+#### Equity Investments with Friends & Family
+
+When your friends and family are investing in your company in exchange for equity, it is your responsibility to detail the risks involved. As a founder, you are
+at risk of injuring your relationships if your early-stage investors are not properly informed and educated. As a result, it is a founder’s obligation to provide
+basic investor education. For example, elucidate when your early investors will be able to convert their SAFE into stock. Often, a subsequent equity financing
+involving a sale of preferred shares provides the trigger.
+
+Beyond raising money, it is important to acknowledge that the investors signing a SAFE will become a part of the company as shareholders. As a result, there are various future stipulations to consider. 
+
+#### Structuring the Deal
+
+1. Don’t Over-Dilute Equity
+
+When onboarding investors through early equity shares, determining a cap on equity is critical. Setting a cap on equity will help to ensure that you do not
+dilute the number of shares available. This is important if you plan on securing formal investors in future fundraising rounds. When you plan for a cap on
+equity, later rounds of investment will be easier to secure, because the equity will not be diluted early on.
+
+Furthermore, equity is a key motivator for both early-stage employees and future investors. As a result, it is important to consider this fact when adding early
+passive stakeholders.
+
+2. Develop Term Sheets
+
+Term sheets are a necessary element to future fundraising. They are useful for two reasons. First, they help to ensure that you do not over-dilute equity.
+Second, the term sheet will outline the risks involved in the investment, which is important in the event that investors do not realize any return on their
+money.
+
+3. Plan your fundraising goals
+
+Although a company may be unable to accurately predict how much money it will raise during the next round, having a clear idea of fundraising goals is essential.
+For instance, a company will want to avoid raising an excessive amount of money through SAFEs. If they fail to do so, it can result in an over-dilution of Series
+A investors when those SAFEs eventually convert into equity. To prevent this, planning in advance and saving a specified amount of equity for your next round of
+fundraising will help ensure that future investors stay interested and motivated.
+
+Once you have secured friends and/or family members as investors, you can begin the process to close the deal.
+
+#### Takeaways
+
+- A SAFE allows start-ups to receive financing from investors. In exchange for money, an investor receives a right to purchase stock in a future equity round.
+- While structuring a SAFE, the most important consideration for a company is to determine a cap on equity to avoid over-diluting shares. 
+- Prior to issuing a SAFE, a start-up will need to first 1) determine the valuation of the company 2) plan its fundraising goal 3) build a business plan, and 4)
+- make a pitch.
+
+#### Disclaimer
+
+This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not
+be regarded as such. Any reliance on the information is solely at the reader’s own risk. 
+
+#### About Clausehound 
+
+Clausehound is a specialized software agency that builds document and knowledge tools for product design teams that support educators and trainers, governments
+and their citizens, law firms and legal teams, and large or small businesses.
+
+Edited by: Rajah Lehal