What is SAFE?
SAFE stands for Simple Agreement for Future Equity, and was invented a few years back by Y Combinator (An incubator/accelerator in California, USA) and we (ID92) have brought it for the first time in Pakistan!
Before we get in the details, there is ONE thing the SAFE should not be confused for. It is NOT a loan.
So why are we even implementing this model?
In Pakistan, the most common method opted by incubators is the ‘Ordinary Shares’ method and where that is working fine, we wanted to bring in something different with the following advantages:
- It is free of legal complexities
- It gives the startups the freedom to get their own valuation
- It rids the startups the initial commitment to pay dividends (this means that they are not under any obligation to pay dividends till the time they don’t raise an investment)
SAFE is an easy document that allows the initial risk taker (that is us) to come in an agreement with the startup to get a certain percentage of equity against a discount in the future when it raises an investment.
Why we call ourselves the initial risk takers is because we are putting in our time, space and paying a stipend against milestones without the guarantee of how the startup will do after it graduates.
This means that when the startup completes its incubation cycle, it has the freedom to go around the market and get a valuation that is mutually agreed between them and the investor and then we have the first right to either buy in or liquidate our equity.
This not only gives us the chance to invest in ideas but also gives the startup a chance to prove their worth.
In our case, we take 2.5% equity against a 30% discount on the valuation (not set by us).