SAFE financing in Canada with post-money SAFEs

The SAFE (Simple Agreement for Future Equity) is the most common way startups raise their first outside money. Carolynn Levy created it at Y Combinator in 2013. YC says it has been used to raise more than $15B for its portfolio companies. YC publishes US versions and valuation-cap versions for companies formed in Canada, the Cayman Islands and Singapore.

What a SAFE is

A SAFE is a contract in which an investor pays now for the right to shares later. It converts into shares automatically when the company raises a priced round. YC is clear that a SAFE is not debt. It has no interest and no maturity date. It is also not stock until it converts.

Post-money valuation cap math

YC has used the post-money SAFE as its standard since 2018. The main advantage is that ownership sold is easy to calculate. On a post-money cap SAFE, ownership equals the investment divided by the cap.

YC gives this example. A founder targeting a $1M raise for 15% ownership sets a post-money cap of about $6.7M. Raising $500K on that cap sells about 7.5%. YC also shows how to raise on two caps: $500K at a $5.5M cap (about 9%) plus $500K at an $8.3M cap (about 6%) reaches the same 15%.

The post-money cap includes all SAFE money and the existing option pool. It does not include the new money from the priced round or a new or enlarged option pool created in that round.

MFN SAFEs

An MFN (most favoured nation) SAFE has no cap or discount. It takes the best terms of any SAFE issued later. YC's own standard deal uses one: $375,000 on an uncapped MFN SAFE alongside $125,000 for 7%. YC advises closing lower-cap SAFEs, fully wired, before issuing an uncapped MFN, because the MFN date is the later of signing or receiving the funds.

Pro rata and other rights belong in side letters

YC recommends keeping the SAFE unmodified and granting extra rights, such as pro rata, in a separate side letter. YC suggests founders weigh rights against cheque size. A $500K investor has a stronger case for pro rata than a $10K investor.

Other mechanics to know

• The company's board must approve issuing SAFEs.
• A SAFE is not binding until the money is received.
• In an acquisition, a cap SAFE holder gets the greater of their money back or the as-converted amount.
• To add money from an existing investor, issue a new SAFE on the same terms.

Canadian considerations

YC's online "Send a SAFE" tool supports only US-incorporated companies. Canadian companies must download the Canadian form and work with a local lawyer. YC tells non-US companies to consult a lawyer licensed in their country before using the forms. Canadian securities rules also govern who can invest and which filings apply. Confirm the exemption you rely on before you accept money.

Founder takeaways

• Start from amount and dilution. Let the cap follow from how much you raise and how much you will sell.
• Keep a SAFE ledger. Track every SAFE, its cap and its date in one cap table.
• Model the priced round. Include the new option pool to see real founder dilution.
• Use the Canadian form. Have a Canadian lawyer review it for your corporation.

This article is general information, not legal or financial advice. Speak with a qualified Canadian lawyer or accountant about your situation.

General information. This article is general information, not legal, tax or financial advice. Confirm the details with a qualified professional before you act.

Sources

1. The SAFE: The standard way startups raise money
   Y Combinator
2. The Y Combinator Deal
   Y Combinator