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Early-stage investing has long been a game of vision and reward and risk. Apart from the grand ideas and audacious pitches, however, there's a tangible aspect each investor needs to be familiar with—structure of investment.

Two of the most valuable instruments available in this world now are SAFE and SPV. Whether you're a seasoned angel or a newbie entering through an angel syndicate, familiarizing yourself with the two will be essential.

Let's break them down simply and clearly.

What Is SAFE?

We'll begin with answering what is SAFE. It's an abbreviation for Simple Agreement for Future Equity.

It’s a contractual arrangement between a startup and an investor. The investor invests money upfront. In exchange, they're promised a future right to take equity, usually when the startup's next funding event occurs.

It's not a debt. It has no interest. It has no maturity date. That's what makes it so "simple."
SAFE was launched in 2013 by Y Combinator. It has since become a very popular early-stage investment vehicle. Particularly in the United States.

Why Investors Love SAFE

To begin with, it’s quick. No protracted negotiation rounds. No steep lawyer’s fees. It gets cash working in founders’ pockets quickly.

Secondly, it's founder-friendly. It doesn't dilute equity immediately. It's beneficial for early-stage teams who would like to maintain control.

Not just that, it's investor-friendly as well. Most SAFEs also carry valuation caps and discounts. Investors receive a larger amount of shares when the firm eventually raises a later equity financing as a reward for bearing early risk.

So when someone asks, "What is SAFE in startup investing?" — a win-win tool that harmonizes founders' and angels' objectives.

How the System Works
 

Here's an example:

If a startup presents a $5 million cap on a SAFE, and you put in $50,000.
One year later, the startup raised a priced round at a $10 million valuation. Since your SAFE has a cap of $5 million, your investment converts at half the cost of the new investors. You now hold a larger piece for the same amount of money. Nice, huh?

But here's the twist: you don't own any shares when you invest. You only become a shareholder later on when a trigger event happens, say a subsequent funding event or acquisition.

You're on the ride until then but not actually on the cap table.

What's an SPV?

SPV means Special Purpose Vehicle. It’s a specific type of entity formed for the purpose of aggregating funds from various investors in a single investment. 

So rather than 10 angels individually investing in a startup directly, they invest via the SPV. The SPV then invests in the firm. 

From the venture's side, they only have a single investor—the SPV. They share the upside, the risk, and the deal from the angel's side.

Why Use an SPV?

There's a number of reasons for this.

1. Cleaner Cap Table
   Startups don't desire a dense investor list. It makes it harder on future fundraising and compliance legally. An SPV appears as a single line on the cap table regardless of the number of investors inside.
    
2. Reduced Investment Minimums
   Angel investors would prefer smaller investments, say anywhere from $1,000 to $10,000. Startups would rather work with investors who can put in $50,000+. SPVs take care of that problem.
    
3. Group decision-making
   Most SPVs also have a lead manager or investor who handles negotiation of terms, monitoring of paperwork, and communication. This eases the life of all parties involved.
    

SPVs and Angel Syndicates

An angel syndicate consists of a group of investors who put their resources together behind a startup investment. Often, there will be a lead angel who sources and evaluates the deal. The remainder of the group will follow their lead.
This is where SPVs fit in. It's usually through SPVs that angel syndicates make investments.
So when a person invests in an angel syndicate, they're usually doing so through an SPV. It allows them to invest in deals they would not otherwise be able to access.
 

SAFE vs. SPV: How Are They Different?

This is where things become interesting. SAFE and SPV are not rival tools. They're used in tandem often.

SAFE is the pact between the investor and the startup. SPV is the vehicle through which a group of investors participate in the deal.
 

So a syndicate would invest through an SPV in a SAFE round. Think of it this way:

SAFE defines the way your money becomes equity.
SPV determines how your money is merged with other's money.

The downsides? Yes, There Are a few

No tool is ever perfect. Here's what to be on the lookout for.

For SAFEs:

• You do not own shares immediately.
   
• Your SAFE may never convert if the startup never raises another round.
   
• You might not have full investor rights.
   

For SPVs:

• Fees exist. SPVs usually have setup and carry (a percentage of profits).
   
• You depend upon the SPV manager to act on your behalf.
   
• Exit timing may be determined by the SPV's process under law.
   

Both tools can be very powerful when used well.

Learn at Angel School 

At Angel School, education is a key area of emphasis. SAFE and SPV form the cornerstones of the playbook during early stages. They assist new investors in accessing good deals. They provide flexibility, pace, and scale.
Most importantly, they make possible collaborative investment—the very kind of investment which drives innovation at the earliest and riskiest points.

Angel School’s Venture Fundamentals course helps you answer what is SAFE, how an SPV operates, and the mechanism by which an angel syndicate deploys them. This course even guides learners through actual examples and case studies.

Keywords: 

Primary:

SPV

Angel syndicate 

Secondary: 

What is SAFE