So, based on the writeup, it's just an option? And this didn't exist already? It seems so obvious in retrospect it's surprising no one had thought to do this.
Is there anything special that makes this substantially different from a vanilla option, or is it just that a Safe is standardized in an easy to use way?
An option, strictly speaking, has an underlying security that already exists. The Safe, like a convertible note, doesn't have an underlying security yet, since the company hasn't created the preferred stock that it would convert into yet.
Well, sort of. In a broad sense an option is simply an irrevocable right to acquire or do something, without an obligation to actually acquire or do it. You can write options for whatever you'd like, despite securities being the most common use.
You're right about securities; the security usually exists prior to offering a contract on it. But even then it gets a little more complicated. For instance, I can write a naked option (an option to buy a security I don't even own). They're pretty flexible instruments, and I'm not sure how Safes are substantially different. That having been said, it sounds great for founders and funders, since it's far simpler than the alternatives, and I'm shocked no one has thought to do this before. Kudos to the YC folks for having the insight to set it up.
Right, but I wasn't speaking in the broad sense. In the legal sense, an option has to have a very specific underlying security. That's the case with even a naked option - you know exactly what the underlying security is. The Safe is substantively different because the underlying security isn't defined at that specific level.
Is there indeed a statutory or regulatory requirement to that effect? I'm not an attorney and you are, so you'd know better than me, but it's my understanding that "option" applies broadly to contractual obligations and rights to sell/purchase property or rights at some sort of preordained terms, conditions, price, or whatever.
But the security does exist I think; they're just not yet traded on a public/liquid market. I've received ISOs in two different companies that were privately held. Those were definitely options, definitely on securities that existed, and those became publicly valued and liquid only after a purchase by a public company (in one case) and an IPO (in the other).
It's entirely possible that I'm missing a subtlety, and I'll follow the discussion to learn what that is.
The subtlety is the Safe converts into a shadow class of securities with rights similar to the next round of preferred stock that the company issues. So those securities are not yet issued, their terms will be negotiated when the company raises that round.
In that case of your ISOs, those would be tied to the existing common stock of the company. While the actual shares that you might exercise on aren't yet issued, the class of stock itself exists and the terms are set.
Is there anything special that makes this substantially different from a vanilla option, or is it just that a Safe is standardized in an easy to use way?