What is a SAFE?
The Simple Agreement for Future Equity (SAFE) is an early stage investment instrument: a contractual promise for future equity that has become increasingly popular with early-stage startups since its introduction in 2013. SAFEs were designed to simplify and replace convertible notes, so a SAFE allows a startup to take in money on a rolling basis from multiple angel and pre-angel investors in exchange for a promise of equity later down the line. Because SAFEs don’t require a valuation or for an entire round to close all at once, they make it much easier to work with casual investors, especially personal acquaintances who do not typically make a habit of investing in startups.
How is a Gust Launch SAFE different?
The Gust Launch SAFE is available in only one variety: discount, no cap. To improve on traditional SAFEs, Gust Launch SAFEs introduce a concept designed to combat founder dilution, which we call “rollup”: if a startup issues a Gust Launch SAFE and subsequently issues a convertible note, the principal investment of the SAFE will transfer to the convertible note round at the same terms as the other convertible note holders. The SAFE investors will then become convertible debt holders. On the other hand, if the startup never issues a convertible note before its first preferred stock round, the SAFE’s investors will still convert their stakes to preferred shares at a 20% discount.
What is a convertible note?
A convertible note is an early-stage fundraising mechanism that allows a startup to take in capital in return for debt that will eventually convert to equity. A convertible note is similar to a SAFE—in fact, it’s the instrument that SAFEs were designed to simplify and replace—but because it is a debt instrument, it has a few key differences.
How is a Gust Launch convertible note different?
Convertible notes are more complicated and historically require more negotiation than SAFEs, which makes them less attractive to friends and family investors but more desirable for professional angel investors. To effectively negotiate a convertible note round, founders therefore need to understand the note’s mechanics. The Gust Launch convertible note removes the difficulty of the negotiations (and reduces risk to founders) by distilling the most typical balance between founder interests and investor interests into a standardized convertible note that focuses on the most important terms for both sides, which helps keep the transactions costs down.