How do SAFEs Work?

A SAFE (Simple Agreement for Future Equity) is a financial instrument used by startups to raise capital quickly and efficiently from investors. It is a form of convertible equity security that entitles the investor to be issued shares of stock in connection with the company’s next priced Preferred Stock financing. Unlike traditional convertible notes, SAFEs do not accrue interest, do not have a maturity date at which they must be paid back in cash, or offer seniority over preferred stockholders in a liquidation scenario. They are designed to simplify early-stage fundraising by offering a straightforward, Finalist-friendly agreement between startups and investors, and have become the preferred convertible equity security instrument for many startups due to their simplicity and flexibility.

Often, the amount of company stock owed to the SAFE investor upon conversion is determined by a valuation cap, setting a maximum company valuation for the purpose of converting the SAFE into equity even if the company ultimately negotiates a priced round at a value above the cap. Sometimes, a SAFE will carry a conversion discount instead of a valuation cap feature, so the SAFE investor would receive stock at a specific discount as compared to the share price paid by new cash investors in the company’s next priced round of equity financing. Occasionally, a SAFE has both features, entitling the SAFE investor to the better of a capped or discounted price.

The Innovation Sandbox SAFE takes the “discount-only” approach, removing the valuation cap while still providing the SAFE investor with a discount in exchange for providing upfront capital (more details below). This approach allows founders to raise capital immediately without negotiating a valuation. SAFE investors receive the discount on shares in the next funding round as the benefit for funding “early,” while founders retain more control over their valuation and cap table. 

The Terms

The investment will be made through an uncapped SAFE using a modified version of the publicly available “Discount, No Valuation Cap” SAFE template from Y Combinator. Key terms are outlined below:

Valuation Cap: None

Discount: Sliding scale based on the time between the ISB SAFE investment and closing of the next priced equity financing. 

a) Fewer than 90 days: 5%
b) At least 90 days but fewer than 180 days: 10%
c) At least 180 days but fewer than 270 days: 15% 
d) At least 270 days but fewer than 360 days: 20%
e) Greater than 360 days: 25%

Sale or Dissolution: In the event of a sale or dissolution of the company while the SAFE remains outstanding, the SAFE Investor is entitled to the greater of a 1.5x return on its SAFE investment or the as-converted equity value at the time of the sale.

Pro-Rata Rights: Yes (via side letter)

Information Rights: Yes (via side letter)

Board Seat: No

The full SAFE and side letter can be downloaded here.

Download Now

Benefits of Being an Innovation Sandbox Finalist

Becoming an Innovation Sandbox Finalist has many benefits, including increased visibility, credibility, and now, Finalist-friendly capital. The exposure of the Innovation Sandbox stage and the recognition from visionary judges often drives heightened inbound interest from potential customers, and the Innovation Sandbox also positions founders to meet the broader RSAC community, which represents a culmination of the leading minds in cybersecurity.

Here are some stats highlighting the value of the RSAC Innovation Sandbox to past Finalists.

  • RSAC Innovation Sandbox Finalists have raised over $16.4 billion after becoming Finalists.1 
  • RSAC Innovation Sandbox Finalists have raised an average of $30 million at a 3.2x step-up in valuation in their first subsequent financing after becoming a Finalist.2
  • 82% of RSAC Innovation Sandbox Finalists have raised subsequent financing rounds (and another 7% were acquired in their first financing transaction following their participation in the RSAC Innovation Sandbox), compared to a broader market average of around 40% for firms that have raised a subsequent financing round.2, 3
 

1  Figures are sourced from information publicly available via Crunchbase as of October 2024 for RSAC Innovation Sandbox Finalists since 2005. Actual results may vary.
2 Figures are sourced from information publicly available via Pitchbook as of October 2024 for RSAC Innovation Sandbox Finalists since 2014. Actual results may vary.
3 These 3 Charts Show It’s Not Easy Being a Seed Startup These Days (crunchbase.com); ISB stats reflect 2014-2024 cohorts.