What are the differences between a SAFE and priced round?

When a startup is seeking to raise capital, there are generally two main types of investment structures available: a Simple Agreement for Future Equity (SAFE) and a priced round. The main differences between these two structures relate to how they define the terms of the investment, the valuation of the company, and the amount of equity or ownership that the investor receives in exchange for their investment.

Simple Agreement for Future Equity (SAFE)

A Simple Agreement for Future Equity (SAFE) is a relatively new type of investment agreement that has gained popularity in recent years, particularly in the startup world. A SAFE is essentially a legal contract that allows an investor to invest money in a startup in exchange for the right to receive equity in the future, when certain pre-agreed events occur.

A SAFE typically does not involve a fixed valuation of the company at the time of the investment, but instead allows the investor to participate in the upside potential of the company as it grows and matures. The key benefit of a SAFE is that it allows startups to raise money quickly and efficiently, without the need to negotiate complicated and time-consuming terms with investors.

Here is an example of how a SAFE might work:

• A startup is seeking to raise $500,000 to fund its growth plans.
• An investor agrees to invest $100,000 in the startup using a SAFE.
• The terms of the SAFE specify that the investor will receive equity in the startup at a future date, when the company raises its next round of funding or achieves a certain valuation milestone.
• The investor’s equity stake in the startup will be determined based on the terms of the SAFE, which may specify a certain percentage of the company’s valuation, or a certain number of shares.
• Until the future equity event occurs, the investor has no ownership or control rights in the startup, but may receive updates and communications from the company.

Priced Round

A priced round is a more traditional type of investment structure that involves negotiating the terms of the investment, including the valuation of the company, the amount of equity or ownership that the investor will receive in exchange for their investment, and any other terms or conditions that may be relevant.

In a priced round, the startup and the investor agree on a fixed valuation for the company at the time of the investment, and the investor receives a specified amount of equity or ownership in the company based on that valuation. Priced rounds typically involve more negotiation and due diligence than SAFEs, and may be more complex and time-consuming to execute.

Here is an example of how a priced round might work:

• A startup is seeking to raise $500,000 to fund its growth plans.
• An investor agrees to invest $100,000 in the startup using a priced round structure.
• The startup and the investor negotiate the terms of the investment, including the valuation of the company, the percentage of equity or ownership that the investor will receive, and any other relevant terms or conditions.
• The agreed-upon valuation for the company is $5 million, and the investor will receive 2% equity in the company in exchange for their $100,000 investment.
• The investor becomes a shareholder in the company and may have certain rights and privileges as a result, such as the right to vote on important company decisions or to receive dividends.

Here is a chart comparing the key differences between a SAFE and a priced round: