SAFE (Simple Agreement for Future Equity)

Investment processes in the entrepreneurship ecosystem are becoming increasingly dynamic, fast, and competitive. Especially for early-stage ventures, reaching an agreement with investors quickly can be more valuable than engaging in long and costly negotiations. This is where SAFE (Simple Agreement for Future Equity) agreements come into play, enabling investors to secure their capital commitment in a fast and flexible manner.

SAFE offers an alternative financing model to Convertible Notes. Its goal is to make the investment process simpler, clearer, and lower-cost for both the entrepreneur and the investor. Since these agreements do not contain a debt component, they allow the investor's payment to the company to be converted into shares to be issued in the future. In short, the investor provides capital today but acquires equity not immediately, but during a future financing round or when a specific event occurs.

The Basic Structure of SAFE

As its name suggests, SAFE is based on very simple logic. The investor pays a certain amount to the company and, in return, gains the right to acquire shares in a future investment round. This financing round is typically a "Price Round," a funding stage where the company's valuation is determined, and new shares are issued.

A SAFE agreement has neither an interest rate nor a maturity date. This distinguishes it from the Convertible Note; SAFE is not considered a debt relationship but an "investment commitment to be converted into equity in the future." The conversion mechanism relies on two main concepts stipulated in the agreement:

• Valuation Cap : Ensures that the investor acquires shares at a certain maximum valuation of the company during the future financing round.

• Discount Rate : Allows the investor to acquire shares at a more favorable price compared to the share price paid by the new investors.

Thus, although the investor assumes a higher risk by supporting the venture in its early stages, they receive compensation for this risk later under more favorable terms.

Advantages of SAFE

The biggest advantage of SAFE is its speed and simplicity. Early-stage ventures often cannot precisely determine their financial valuation, which means traditional investment agreements require lengthy negotiations. SAFE shortens this process and establishes a quick financing bridge between the investor and the entrepreneur.

Furthermore, because SAFE does not carry a debt component, it does not create an interest burden or a repayment obligation for the venture. This is a significant advantage for young startups with limited cash flow. From a legal standpoint, its standardized contract structure reduces transaction costs and makes the investment process more predictable.

From the investor's perspective, SAFE offers the possibility of acquiring shares at a discount to the future equity value. If the venture grows and raises capital at a high valuation, the SAFE investor can be amply rewarded for their early stage risk.

The Status of SAFE in Turkish Law

SAFE agreements are not directly regulated in Turkish Law; thus, these instruments are typically prepared subject to the Anglo-Saxon legal system. In Turkish practice, SAFE-like agreements signed between the investor and the entrepreneur are treated as a form of preliminary contract or share commitment agreement (pay taahhüt sözleşmesi).

However, there is a crucial legal sensitivity here: under the Turkish Commercial Code, a company's acquisition of its own shares is restricted in Joint Stock Companies and prohibited in Limited Companies. Therefore, SAFE agreements are structured in practice by granting a right to new shares that the company will issue in the future, within the framework of the TCC's capital increase provisions. This means the investor provides cash to the company with today's investment but acquires the equity not immediately, but when the capital increase occurs. This structure, when adapted to Turkish Law, can be implemented without issue in practice.

Risks of SAFE

Although SAFE agreements offer a simple and fast solution, they entail certain risks. Most importantly, the legal nature of SAFE is ambiguous. Since there is no explicit legal definition in Turkey, how the parties' rights will be protected may not always be clear. Additionally, there is a risk that the investor may not become a shareholder if the conversion trigger does not occur.

Another risk is deferring the company's valuation to the future. If the subsequent financing round occurs at a lower valuation than expected, the investor might not achieve the anticipated share percentage. To prevent such disputes, the SAFE agreement must be meticulously prepared, and parameters such as the valuation cap and discount rate must be clearly defined.

Conclusion

SAFE is a modern instrument in venture finance that provides speed, flexibility, and low cost. It offers a much more practical solution compared to traditional investment agreements, especially for early-stage ventures. Nevertheless, because it is not directly regulated in Turkish Law, careful legal framing is required for its practical application.

When structured correctly, SAFE can build a foundation of mutual trust and long-term cooperation for both the investor and the entrepreneur.

This content is intended for general informational purposes only; it does not constitute professional legal advice regarding specific cases.