A SAFE is an acronym for Simple Agreement for Future Equity. The SAFE is a type of contract imagined and created by Y Combinator in 2013 as an alternative to convertible notes to simplify the financing of startups.
The SAFE is a form of financing for US-based companies by which the investors make an investment into a target company which will convert into equity of the target upon the occurrence of a pre-determined event, usually the target’s next equity financing round.
The terms of the SAFE are flexible and will determine, amongst others, the formula to calculate the number of shares that the investors will receive (e.g. with a valuation floor and cap, a discount, etc).
The conversion into shares is however not guaranteed and is only triggered if and when certain events occur (typically, a round of equity financing).
Unlike convertible notes, a SAFE does not bear any interest and has no maturity date.
This being said, upon dissolution or sale of the target not giving rise to the conversion into shares, holders of SAFE have a right to call repayment of their investment, but such repayment comes after all other debt has been repaid.