SAFE agreement in the Netherlands: how does a SAFE work for startups?

For startups looking to raise external capital, the question of how to legally structure an investment eventually arises. A direct equity investment is the most obvious route, but it can be relatively complex in the early stages. The company's valuation must be determined, the investor's stake must be set, and the issuance of shares must be formalized.

A SAFE offers an alternative. SAFE stands for Simple Agreement for Future Equity. The investor provides funds to the startup immediately but does not receive shares right away. The investment is settled at a later date, for example, when a new investment round takes place.

This makes the SAFE attractive to startups and scale-ups that need funding now but want to defer the discussion about a definitive valuation or share price to a later date.

At the same time, a SAFE is legally more than just "money now, shares later." The terms determine how many shares an investor ultimately receives, what happens in the event of an exit, and how the investment is treated if the company is wound up. The tax classification can also be relevant.

What is a SAFE agreement?

A SAFE is a financing instrument in which an investor provides an amount to a company with the prospect that the investment will be converted into shares or settled in cash under certain circumstances.

The standard SAFE has two features that clearly distinguish it from a traditional loan: there is generally no fixed term, and no interest is paid.

The investor does not receive interest payments each year and, under normal circumstances, cannot simply demand repayment of the principal after, say, three or five years. Instead, it is agreed in advance which events will trigger the settlement of the SAFE.

This aligns well with the economic rationale behind the instrument. The investor takes on risk at an early stage and hopes to be rewarded when the company increases in value. That reward is not structured as interest, but rather lies in the terms under which shares are later acquired or a payout is made.

This can be attractive for young companies. Funding can be secured without having to negotiate all the terms of a full-fledged equity round at the same time.

Why do startups use a SAFE?

One of the most difficult aspects of investing in a young startup is the valuation. How do you determine the value of a company that may have little to no revenue, but possesses technology, intellectual property, a team, or strong growth prospects?

In a direct equity investment, that valuation is critical. After all, someone investing €250,000 in a company with a €2.5 million valuation ends up in a different position than someone investing the same amount at a €5 million valuation.

A SAFE can partially defer that discussion to the future. The startup receives the money immediately, while the final number of shares is determined later.

This makes a SAFE particularly useful when speed is essential and a comprehensive investment round is not yet appropriate. In the Netherlands, SAFEs are used for early-stage investments, for example by angel investors. However, the instrument is also used for larger amounts and in later stages of development.

A SAFE does not, however, completely eliminate the valuation question. The way in which conversion occurs later is closely tied to agreements regarding valuation. Two concepts often play a central role here: the valuation cap and the conversion discount.

How does a valuation cap work in a SAFE?

A valuation cap sets a limit on the valuation used for the SAFE investor when calculating their conversion.

This can be important if a startup's value increases significantly between the closing of the SAFE and the next investment round.

Suppose an investor invests €250,000 via a SAFE and the parties agree on a valuation cap of €2.5 million. At that point, the SAFE investor does not yet hold an actual equity stake. However, the cap ensures that a valuation of no more than €2.5 million is used for the relevant calculation upon later conversion.

When a new investor joins later at a higher valuation, the SAFE investor can convert at a more favorable price than that new investor.

That is where the economic reward for the earlier risk lies. After all, the SAFE investor provided their capital when the company was at a more uncertain stage.

The valuation cap is not a pre-determined equity percentage

It is important for founders not to automatically interpret a valuation cap as a definitive percentage of the company.

A SAFE investor only receives shares upon conversion. Furthermore, that conversion often takes place at the same time as a new share issuance, which can lead to immediate dilution.

The final position of the SAFE investor therefore depends on the agreed terms as well as the circumstances of the new financing round.

For startups, this means you should not only look at the amount being raised today. You must also understand the effect the SAFE could have on the cap table during a subsequent round.

How does a discount work with a SAFE?

In addition to a valuation cap, a SAFE may include a conversion discount.

The rationale is similar. The early investor receives an economic advantage over the investors who join during the next financing round.

With a discount, that advantage is linked to the price paid by the new investors. For example, if a discount is applied to that price, the SAFE converts at a lower price per share.

A valuation cap works differently. In that case, a maximum company valuation is used for the SAFE investor's conversion calculation.

That difference can be financially significant. The benefit of a fixed conversion discount is limited by the size of that discount. With a valuation cap, the benefit can increase as the value of the company rises above the agreed cap.

Which system is appropriate therefore depends closely on the economic agreements between the startup and the investor.

When does a SAFE convert or terminate?

An important feature of the SAFE is that it is not a fixed maturity date, but rather specific events that determine when the instrument is settled.

In the standard structure, three scenarios are particularly relevant: a new equity financing, a liquidity event, and the termination of the company.

New equity financing

The scenario most familiar to startups is a new investment round.

When the company issues new preferred shares to an investor, the SAFE can convert into preferred shares according to the agreed-upon terms.

The number of shares is then determined based on the terms set out in the SAFE, such as a valuation cap or conversion discount.

This is the scenario where the "future equity" nature of the instrument becomes most apparent. The investor provides capital today but only receives their shares once a subsequent financing round triggers conversion.

For founders, this is the exact moment when previously signed SAFEs suddenly become a tangible part of the company's equity structure.

Anyone with multiple outstanding SAFEs must therefore have a clear understanding of how many shares could be issued in a future round. The fact that a SAFE does not immediately result in new shareholders upon signing does not mean that dilution can be ignored.

Sale, IPO, or other liquidity event

A SAFE must also stipulate what happens if the company is sold before a standard equity round has triggered conversion.

A liquidity event may include an IPO, a change of control of more than 50 percent, or the sale of substantially all of the company's assets.

In such a situation, the SAFE can be settled in cash.

The payout does not necessarily have to be limited to the original investment. Depending on the SAFE terms, the investor may be entitled to a higher amount linked to the agreed-upon cap and the value realized during the liquidity event.

This is relevant in the event of a successful exit. Even if the SAFE has never converted into shares, the investor can still economically benefit from the company's increase in value.

For founders and potential buyers, this means that outstanding SAFEs must not be overlooked during an exit. They can directly impact the distribution of the sale proceeds.

Termination or liquidation

The third key scenario is the end of the company.

In the event of voluntary termination, dissolution, liquidation, or winding up, the SAFE may entitle the holder to a payment up to the amount of the original investment.

In this regard, the SAFE occupies a unique position in the order of priority.

For such payments, the SAFE ranks behind regular creditors but ahead of common shareholders. If, after paying off creditors, there are insufficient assets to fully repay all relevant investors, the available amount is distributed on a pro-rata basis.

This further illustrates how a SAFE can combine characteristics of both debt and equity. Before conversion, the investor is not yet a common shareholder, but economically, they are also not in the exact same position as a traditional creditor.

Is a SAFE investor entitled to dividends?

Normally, a SAFE holder is not yet a shareholder prior to conversion. Nevertheless, the agreement may account for dividends paid out to common shareholders in the interim.

With a standard SAFE, the SAFE investor can receive a payment in such a situation as if the SAFE had already been converted into ordinary shares.

Here, too, you can see the hybrid nature of the SAFE. Legally, the shares have not yet been actually issued, but certain economic consequences can already align with the position the investor would hold after conversion.

Is a SAFE in the Netherlands a loan or equity?

Legally, this is one of the most interesting questions surrounding the SAFE.

At first glance, there are clear characteristics that suggest equity. The SAFE has no fixed term, carries no interest, and is intended to allow the investor to benefit from future value development. Moreover, the name Simple Agreement for Future Equity itself points to the expectation that the investor will eventually receive shares.

Nevertheless, a standard SAFE can be qualified as a loan agreement under Dutch civil law standards.

Crucial to this is the fact that the SAFE also includes situations in which the company may be obligated to pay money to the investor. For example, upon the termination of the company, an amount up to the original investment may be due.

The SAFE therefore does not fit neatly into one classic category. The instrument has various capital characteristics, but that does not prevent the agreement from being treated legally as a loan.

For startups, this is more than a theoretical discussion. The legal qualification carries over into the tax analysis of the SAFE.

Caution is required here, however. The exact outcome depends on the specific terms of the agreement. A SAFE should therefore not be judged solely by its name; the content of the agreements is decisive.

How is a SAFE treated for tax purposes?

When a SAFE qualifies as a loan under civil law, that qualification is in principle followed for corporate income tax purposes.

There are exceptions for specific forms of financing, but for a standard SAFE between independent parties, fiscal reclassification as equity is not automatically expected.

In the case of a SAFE, some potential exceptions are even less likely.

For instance, while the SAFE has no fixed term and is subordinated to regular creditors, settlement can also occur during events such as an acquisition, IPO, or sale of assets. This makes the spectrum of settlement events broader than in financing that is only due upon bankruptcy, suspension of payments, or liquidation.

Furthermore, the return for the SAFE investor is not directly dependent on profit. Conversion is linked to factors such as the share price, the company's capitalization, the investment amount, and the agreed-upon valuation cap or discount.

For a SAFE between independent parties, classification as a non-arm's length loan is also unlikely. For financing between related parties, the assessment may differ, as it must then be specifically examined whether an independent third party would have provided the same financing under similar conditions.

For startups entering into a SAFE with founders, existing shareholders, or other related parties, that nuance is therefore relevant.

The conversion right itself can have tax consequences

The tax analysis does not stop at the question of whether the SAFE is a loan.

A key component of the SAFE is the right to future conversion. It is precisely this conversion right that represents economic value. After all, the investor is granted the opportunity to receive shares or related proceeds upon certain future events, subject to pre-agreed terms.

When the SAFE holder is a private limited company (bv), the value of that conversion right may be fiscally relevant at the time the SAFE is entered into.

Subsequently, changes in value and benefits derived from the conversion right may also impact taxable profit.

Under certain circumstances, the participation exemption may apply. In this context, it is relevant whether the conversion right leads, or would lead upon conversion, to an interest that qualifies for the participation exemption.

This potential application concerns benefits associated with the conversion right. The principal amount of the SAFE must be distinguished from this.

For startups themselves, it is particularly important to note that a SAFE does not only have civil law and cap table implications. Especially when the investor invests through a private limited company (bv), fiscal valuation and qualification questions may also arise.

SAFE or convertible loan agreement?

In addition to the SAFE, a convertible loan agreement, usually abbreviated as CLA, is frequently used in startup financing.

Both instruments can be useful when a company wants to raise funding now, while a direct equity investment involving a full valuation discussion and extensive documentation is not yet appropriate.

In both structures, the financier invests first, and shares may follow later.

The SAFE was specifically developed to eliminate some of the complications of traditional convertible loans. With a CLA, issues such as a fixed term, extension of that term, interest, and the treatment of accrued interest upon conversion can play a role. The standard SAFE attempts to simplify the structure by, in principle, having no interest and no fixed term.

That does not automatically mean that a SAFE is always better.

In practice, CLAs are still widely used, particularly by traditional investment funds when they do not take shares directly. SAFEs are also being applied more broadly, both for smaller investments in young companies and for larger financings.

The choice should therefore not be reduced to the question of which document is the shortest or simplest. More important is the economic and legal position that the parties wish to create.

A startup must, among other things, understand how the investment converts during a subsequent financing round, what valuation methodology applies, what happens in the event of an exit, and what position the investor holds if the company is liquidated.

What should startups look out for when entering into a SAFE?

The appeal of a SAFE lies largely in its speed and simplicity. Precisely because of this, there is a risk that founders may pay less attention to the long-term economic consequences.

A first point of attention is the valuation cap. A low cap may be attractive to the investor, but it can lead to a significant conversion advantage if the company experiences strong growth.

A second point of attention is dilution. The SAFE investor does not receive shares upon signing, which may make the cap table appear unchanged at that moment. However, in a later financing round, the shares issued through conversion must be taken into account.

A third point is the exit. A sale of the company before a subsequent financing round does not mean the SAFE disappears. The agreement may actually entitle the investor to a payment higher than the original investment in the event of a liquidity event.

In addition, the ranking in a less positive scenario deserves attention. A SAFE holder is not equivalent to an ordinary creditor, but neither are they an ordinary shareholder. That distinction can be significant when there are insufficient assets available to pay all parties involved in full.

Finally, tax implications should not be ignored. Especially when investing through a private limited company (bv) or when financing takes place between related parties, the classification of the SAFE can have further consequences.

A SAFE is simple in design, but not without consequences

For startups, a SAFE can be a practical tool for raising capital without immediately organizing a full equity round. The company receives the funds right away, while the share issuance and final conversion are deferred to a future date.

However, that simplicity does not mean the economic outcome is straightforward.

The valuation cap, any potential discount, the conversion terms, the treatment upon an exit, and the position in the event of liquidation collectively determine what the SAFE ultimately means for founders and investors. Moreover, under Dutch law, a SAFE may be classified as a loan, despite its clear characteristics that resemble future equity.

For startups and scale-ups, one point is therefore particularly important: do not just look at how much capital the SAFE provides today. Also look at what happens tomorrow when a new investor comes on board, the company is sold, or the SAFE actually converts.

A well-structured SAFE can significantly simplify financing. But "simple" does not mean that the legal, tax, and financial implications of the agreements can be overlooked.

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