What are the benefits of using a SAFE (Simple Agreement for Future Equity) for your Singapore startup?

simple agreement for future equity Singapore

In 2013, Y Combinator came up with the SAFE as an evolution of the convertible note. The SAFE was developed as a quick and simple alternative to the convertible note, in the hope that it would save both investors and startups legal fees as well as reduce the amount of time required to negotiate an agreement.

Deemed by many in the U.S to be the most efficient form of raising financing during the seed stage, it’s fairly surprising that SAFEs don’t seem to have taken off in Singapore.

This could possibly be due to the fact that SAFEs have been perceived to be more “founder-friendly” and that the convertible note is a more pro-investor instrument. Investors in Singapore tend to be a more conservative bunch than their Silicon Valley brethren.

Features and Benefits of a SAFE for Singapore Startups

  1. Unlike a convertible note, a SAFE doesn’t have any elements of a debt instrument. A SAFE allows investors to invest a specified sum of money for the opportunity to convert their investment into equity upon a subsequent equity financing where preferred shares are issued.
  2. The lack of the debt component is what makes the SAFE a relatively quick and painless agreement to execute. In a true SAFE, there’re less terms to negotiate, and founders and investors will usually only have to negotiate valuation caps and discounts.
  3. No debt means no interest and no maturity date. This also means that, depending on how the SAFE is drafted, there’s the possibility it never converts to equity and there’s nothing in the agreement that will call for the investment to be repaid.
  4. Similar to a convertible note, the SAFE retains the advantage of allowing the founder to raise funding while simultaneously avoiding having to put a price on his startup for the time being.
  5. There tends to be less protection for investors compared to convertible notes. While there can be mutant variations of SAFEs that skew towards investors, the risk tends to run a little higher for investors as there’s usually no recourse in the event the startup flops and doesn’t get to the equity financing stage. In addition, in the event the startup has to wind down, it’s better to own debt rather than a right to own equity as company law in Singapore imposes a fiduciary duty to creditors when the startup approaches insolvency.

If you’d like to have an affordable, experienced lawyer assist you in drafting or vetting your SAFE, get in touch with us here.