SAFE

What is a SAFE?

SAFE (Simple Agreement for Future Equity) denotes a contract from the US market under which an investor provides capital to a company today and in return receives future shares on terms fixed in advance. In German it is loosely rendered as "Vereinbarung über künftige Anteile" (agreement on future shares), and in the market it is also called a SAFE note, although it is not a debt instrument. The shares arise only in the next funding round with a fixed price per share (a priced round). A SAFE is neither a loan nor an equity stake: it provides for no interest, no term and, in principle, no right to repayment. It resembles a voucher that is redeemed only when the company offers its shares at a fixed price, and that then guarantees a discount or a maximum price.

In the US market, the accelerator Y Combinator published the SAFE as a standard template at the end of 2013; since then it has been widespread there in the early stage of corporations governed by Delaware law. German founders encounter it mainly when they raise capital from US investors, take part in a US programme or have placed their GmbH (German limited liability company) under a US holding company. The template cannot be used for a German GmbH without adaptation. In Germany, the economic idea is usually implemented through a convertible loan.

How a SAFE works in the US market

The investor pays an investment amount (purchase amount) and thereby becomes neither a creditor with a claim to interest nor a shareholder with voting rights. If a priced equity round takes place, the SAFE converts automatically into preferred shares (preferred stock) of the new series. If the SAFE contains a valuation cap and a discount, the lower of the two prices applies, as with a convertible loan. If this conversion price is below the round price, the investor usually receives shares of a separate sub-series (shadow series), whose priority on a sale is measured by the lower conversion price.

The template contains its own rules for two cases before such a round. On a sale or stock market flotation (liquidity event), the investor receives the higher of the repayment of the purchase amount and the value that would result from conversion at the cap. On a dissolution (dissolution event), the purchase amount is satisfied after the creditors but before the holders of common shares. There are variants with a cap, with a discount and with mere most favoured nation (MFN) treatment, under which the investor can adopt the more favourable terms of SAFEs issued later. In addition, there is an optional side letter on participation in future rounds.

Pre-money SAFE and post-money SAFE

The original template related the cap to the number of shares before conversion (pre-money SAFE). A SAFE holder's percentage was therefore only fixed with the round, and several SAFEs diluted one another. Since 2018, the post-money version has been widespread in the US market: the cap applies as the valuation after conversion of all SAFEs but before the new capital of the round. Each further SAFE dilutes only the existing shareholders up to the round, not the earlier SAFE holders. With the same cap, the founders give up more shares under the post-money version; the logic corresponds to that of a post-money valuation.

Formula (post-money SAFE): Percentage before the new round capital = purchase amount / post-money cap; conversion price = post-money cap / shares including all converted SAFEs

Why the US SAFE does not fit the GmbH

Shares arise only through a capital increase

In the US market, a company governed by Delaware law can issue authorised but not yet issued shares by resolution of its governing body. In a GmbH, new shares (Geschäftsanteile) arise only through a capital increase with a resolution of the shareholders' meeting authenticated by a notary, a subscription declaration recorded or certified by a notary, and entry in the commercial register. Authorised capital under Section 55a of the German Limited Liability Companies Act (GmbHG), by which the articles of association authorise management for at most five years to make increases of up to half of the share capital, simplifies implementation. It does not replace the subscription declaration and the registration. An automatic conversion as in the US template therefore does not exist; the contract can only create obligations to bring about the capital increase.

Form, subordination agreement and governing law

If shareholders undertake to transfer existing shares, the agreement must be notarially authenticated under Section 15 (4) GmbHG. Whether commitments to cooperate in a future capital increase require a particular form has not been conclusively settled; SAFE-like contracts for a GmbH are therefore frequently authenticated as a precaution.

Insolvency law also requires adjustments. For the case of a sale or dissolution, the SAFE provides for a repayment claim. Without a qualified subordination agreement (qualifizierter Rangrücktritt) that makes it a subordinated liability, it can count in the over-indebtedness balance sheet, the comparison of assets and debts, and thereby contribute to an obligation to file for insolvency. The law that governs the contract can indeed be chosen (governing law), but the capital increase of a German GmbH always follows the GmbHG. Where pre-formulated terms are used with many investors, a review of the terms under the law on standard terms and conditions may also come into consideration.

SAFE in Germany: implementation through the convertible loan

For a German GmbH, a convertible loan modelled on the US template usually takes over the function of the SAFE. Typical features are:

• no interest or a low interest rate and a long term
• a qualified subordination agreement with a repayment block even before an insolvency
• an obligation to convert in the next qualified financing round at the lower price resulting from the discount and the cap
• mandatory conversion at the cap at the end of the term instead of repayment
• for the case of a sale, a choice between repayment and conversion immediately before completion
• commitments by the shareholders to approve the capital increase and to waive subscription rights

There are practical reasons why the convertible loan has become established in Germany. The loan agreement is regulated in the German Civil Code (BGB) and is classified for accounting and insolvency purposes, subordination and conversion mechanics are well tested, and investors, law firms and notaries know the documentation.

A structure that comes closer to the SAFE economically is less common. The investor pays its amount immediately as a contribution to the capital reserve of the GmbH. The company and the shareholders undertake to issue it new shares in the next round on the agreed terms. The structure usually provides for no contractual repayment claim, so the investor bears the full risk that the round does not take place. Such contracts are little standardised and raise their own company law and tax questions.

The position is different where a US holding company sits above the GmbH, for example after a share exchange (flip). A SAFE can then be concluded at holding level under US law. The German subsidiary remains unaffected in terms of company law, but the tax consequences of the structure have to be reviewed separately.

Worked example: calculating a post-money SAFE and a pre-money SAFE

The example follows US practice and is calculated in US dollars. A US corporation has 8,500,000 shares including the option pool, that is, the shares reserved for employee options. It concludes two post-money SAFEs with a cap of USD 10 million each: SAFE 1 for USD 1 million, SAFE 2 for USD 500,000.

• SAFE 1 percentage: 1 million / 10 million = 10%; SAFE 2 percentage: 0.5 million / 10 million = 5%; existing shareholders: 100% minus 15% = 85%
• Shares before the new round capital: 8,500,000 / 0.85 = 10,000,000; conversion price: USD 10 million / 10,000,000 = USD 1.00
• Conversion shares: SAFE 1 receives 1,000,000 shares, SAFE 2 receives 500,000 shares
• Comparison with a pre-money cap of USD 10 million: price 10 million / 8,500,000 = about USD 1.18; conversion shares of both SAFEs: 1.5 million × 8,500,000 / 10 million = 1,275,000; percentage: 1,275,000 / 9,775,000 = about 13.04%, existing shareholders about 86.96%
• Third post-money SAFE for USD 1 million at the same cap: SAFE holders together 25%, existing shareholders 75%; SAFE 1 keeps 10%, SAFE 2 keeps 5%
• Subsequent round without the third SAFE: USD 4 million at a pre-money valuation of USD 16 million gives 4 / 20 = 20% for the new investors; SAFE 1 falls to 10% × 0.8 = 8%, SAFE 2 to 4%, the existing shareholders to 68%
• Price per share in this round: 16 million / 10,000,000 = USD 1.60, whereas the SAFE holders paid USD 1.00

The comparison shows the post-money logic: with the same cap, the SAFE holders receive more shares, and every further SAFE falls entirely on the founders. Only the new capital of the round dilutes all participants equally. For German convertible loans, it follows that the contract must state expressly whether the cap is meant as a valuation before or after conversion.

Distinctions: SAFE, convertible loan, convertible note and preferred stock

• Convertible loan: a loan with interest, term and a repayment claim that converts into shares, the German counterpart to the SAFE.
• Convertible note: the US form of the convertible loan with interest and maturity. The SAFE was developed as a simpler alternative to it.
• Preferred stock: the preferred shares of a US company into which the SAFE converts. In the GmbH, they correspond to shares with preferential rights under the articles of association and the shareholders' agreement.

Common mistakes

• US template used unchanged for a GmbH. The automatic conversion in the template presupposes a company that can issue shares without a shareholders' resolution. In a GmbH, the contractual basis for the capital increase is then missing.
• No subordination agreement. Repayment claims for the case of a sale or dissolution can burden the over-indebtedness test without a qualified subordination agreement.
• Formal requirements overlooked. Shareholder obligations to cooperate or to transfer shares without notarial form endanger enforceability.
• Post-money cap underestimated. Anyone who reads the cap like a valuation before the round calculates with less dilution than actually occurs.
• SAFEs stacked without an overall calculation. Every further post-money SAFE reduces the founders' percentage alone; without a continuous pro forma calculation in the cap table, this becomes visible only in the round.
• Preference of the conversion shares left open. If it is not regulated whether the liquidation preference is measured by the purchase amount or the round price, additional negotiation is needed in the round.

Frequently asked questions

Is a SAFE effective in Germany?

As a contract under the law of obligations, in principle yes, provided the formal requirements are observed. The conversion into shares of a GmbH cannot, however, be brought about by the contract alone, but only through a capital increase in which the shareholders cooperate.

Does a SAFE have a term?

No. The US template knows neither maturity nor interest. If there is neither a round nor a sale or dissolution, the SAFE continues indefinitely, and the investor cannot demand its money back. SAFE-like German convertible loans, by contrast, usually provide for an end of term with mandatory conversion.

What does a SAFE holder receive on a sale before the round?

Under the US template, the higher of two amounts: its purchase amount, or the proceeds that would fall to the shares it would receive on conversion at the cap. With a high purchase price, the SAFE thus acts like an equity stake, and with a low one like a repayment claim that is satisfied before the common shares.

What is the difference between a SAFE and a convertible loan?

The convertible loan is a loan: it has interest, a term and a repayment claim until it converts. The SAFE has none of these; money is returned only on a sale or dissolution before the round. For a GmbH, it is therefore reproduced as a non-interest-bearing or low-interest convertible loan with a long term, a subordination agreement and mandatory conversion.

Can a German GmbH conclude a SAFE with US investors?

Yes, but not in the US version. For a GmbH, the contract is adapted to the GmbHG, insolvency law and formal requirements, as a rule as a convertible loan. For the negotiation, what matters is that the economic key points of the template are transferred in a comprehensible way.

The Roemer Capital view

Roemer Capital deals with SAFEs mainly when a company has raised capital from US investors or a move to a US holding company is being examined. In preparing a funding round, Roemer Capital converts every SAFE and every SAFE-like convertible loan into the same calculation logic: reference basis of the cap, discount, percentage before and after the new capital. Only then can instruments of different origin be set side by side and brought into the negotiation of the round.

Whether and how a US template is adapted for a German GmbH is assessed by the company's law firm. Roemer Capital supplies the economic key figures for this and shows how each variant affects the founders' ownership percentages.