Simple Agreements for Future Equity – not so simple?

Y-Combinator’s SAFE (Simple Agreement for Future Equity) notes are a form of contract used in financing of early stage ventures, that promise to convert an investor’s money into shares at a price to be determined at a later date when an equity round establishes a valuation of the company. Although these contracts may at first appear to precisely specify the number of shares to be issued, in practice, several different approaches are used to calculate this number, that lead to divergent consequences. We argue that contracts of this type introduce a contradiction into a set of equations that usually govern equity financing rounds, the resolution of which requires that a strict subset of these equations be treated as valid. We show that different choices for this subset lead naturally to the different approaches for calculating the number of shares issued. In the case of SAFE notes, their definition moreover has a circular nature that places some constraints on the equity round. We also point out a game theoretic aspect to the situation around these contracts. The players in the associated game are the company, the SAFE note investor, and the investor in the equity round. We discuss strategies for each of these players when faced with different choices of contract and approaches to their execution.