Y Combinator, a previous proponent of convertible debt, has unveiled a new type of investment security – the “simple agreement for future equity.” Or, as they’re abbreviating it, the SAFE. (I wouldn’t have advised calling it “SAFE,” as an investment in a startup is inherently risky. Despite the name, most investors should understand that just because it’s called SAFE does not make it a safe investment.)
Security instruments are contracts by which companies exchange an interest in the company for consideration–usually cash used to finance the company. The SAFE is a contract that has some different features from traditional security instruments. To understand the SAFE, it’s helpful to have a grasp of the more traditional security instruments.