TLDR

  • Pay now, receive later - Both ASAs and SAFE notes are equity instruments that allow for investors to be issued with shares in the future in exchange for capital in the present.
  • Benefit to investors - When shares are eventually issued to investors who have invested through ASA or a SAFE note, they will be provided at a discount or with a valuation cap on shares purchased.
  • Benefit to companies - ASAs and SAFE notes enable companies to receive capital before funding rounds and without the need for a valuation or share price to be agreed upon.

ASA

An Advanced Subscription Agreement (ASA) is an equity instrument where an investor ‘pre-pays’ for shares in a company, meaning they invest in the company, agreeing to purchase shares, but receive their shares at a later date during a future funding round.

Simply put, under an ASA, the investor provides capital to a startup in return for the right to purchase shares in that company at a later date.

The advantages for the investor to invest through an ASA is that when the company enters its funding round, the shares issued to the ASA investor will be provided at a discount compared to those issued to the other investors involved in the round. This means ASA investors will pay less for their shares than other investors.

Typically, an ASA investor will receive a discount of 10-30% of the valuation applied at the round in which the shares are issued. This reflects the additional risk they take of providing early funding.

Unlike a Convertible Note (CN) or Convertible Loan Note (CLN), capital invested through an ASA cannot be repaid in cash. As such, an ASA is considered equity.

SAFE notes

Simple Agreement for Future Equity (SAFE) notes were created in 2013 by Y Combinator. They are simpler alternatives to CLNs and, like an ASA, allow investors to be issued with shares in the company in the future, if and when there is a future round.

The advantage of SAFE notes is that they allow a company to receive investment early on that converts into equity in the future. This means no specific share price needs to be determined at the time of the raise and the valuation of the company can be deferred to a later date.

Under SAFE notes, investors gain the right to convert the amount invested into equity when a pre-agreed trigger event occurs. Typically, this pre-agreed event is a fundraising round by the company, usually the next subsequent funding round. The number of shares the investor receives will depend on the amount they invest through the SAFE note and the share price that is determined in the round.

SAFE notes can include a discount on the price of future shares purchased, a valuation cap on future shares purchased (the highest price that can be used to set the conversion price of the SAFE note), both or neither. Without a discount price or valuation cap, the SAFE note simply converts into equity at the price of the company's subsequent round. It is, therefore, uncommon for both to be absent as this would provide little incentive for investors to provide capital upfront.

Unlike a CLN, where interest payments must be made to the note holder, SAFE notes do not require this. There is also no maturity date to SAFE notes like there is with a CLN.

Advantages of an ASA and SAFE note for companies

For a company, the advantages of both an ASA or SAFE note is that they enable them to receive capital before funding rounds. Another advantage is that there is no need for a valuation or share price to be agreed upon between the company and investors as these are fixed at a later date.

It is worth noting that as more shares are issued under ASAs and SAFE notes, fewer shares are left for investors in future rounds which may prove unappealing.

ASAs and SAFE notes may be a preferable equity instrument for startups as, unlike CLNs, they are not debt and therefore do not accrue interest.

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