YC SAFE for Cayman Islands Companies
TL;DR
The SAFE is a founder-friendly instrument for early-stage fundraising without setting a valuation.
In the Cayman Islands, the YC SAFE is typically used with minor adjustments but should comply with Cayman contract law and the Companies Act (2023 Revision).
You should work with local counsel to ensure enforceability and alignment with local corporate governance requirements.
Founders should ensure their Memorandum and Articles of Association (M&A) permit share issuance and conversion.
A SAFE is not a debt instrument (no interest, no maturity), but it still gives its holder the right to receive equity under certain conditions.
Corporate governance steps, register updates, and economic substance compliance must be carefully managed.
What is a SAFE?
Under a standard SAFE, investor provides capital now and gets shares later at the next priced round or liquidity event, whichever occurs earlier. The SAFE simplifies early-stage investment by postponing valuation negotiations and avoiding interest or maturity dates.
Since Y Combinator introduced the original SAFE in 2013 (and the post-money version in 2018), it has become a global standard for pre-seed and seed financing. Cayman companies often use this form, typically keeping U.S. governing law, such as Delaware, California, or New York, unless local enforcement is specifically needed. In 2023, Y Combinator released a SAFE version designed specifically for Cayman companies.
Key Features
Post-Money Valuation Cap
Sets a ceiling on the valuation at which the SAFE converts into equity. The cap is post-money, meaning it includes all SAFEs and other convertible instruments in the total capital base.
Liquidity and Dissolution Rights
The SAFE outlines investor entitlements in a sale, IPO, or company dissolution. Although early-stage startups rarely return significant value in liquidation, SAFEs may offer preferential payouts or convert into equity if a liquidity event occurs.
Cayman-Specific Considerations
Governing Law
The YC SAFE defaults to California law. For Cayman companies, it’s common to switch the governing law to Cayman and set the Cayman Islands as the dispute resolution forum.
Memorandum and Articles of Association (M&A)
The M&A governs how shares are issued and converted. To accommodate SAFEs:
Confirm that Preferred Shares (or equivalent) are authorized in the M&A or can be created via special resolution.
Ensure there are no pre-emption rights, transfer restrictions, or director/shareholder approval requirements that would block a conversion.
Consider pre-approving share issuance through board and shareholder resolutions to streamline SAFE conversions later.
Corporate Procedures: Share Issuance and Registry Updates
Cayman Islands companies must adhere to formal procedures when SAFEs convert:
Board Resolution: Directors must approve the issuance of shares upon conversion, often via a written resolution.
Register of Members: The company must update its internal register of members to reflect the newly issued shares. This register is the definitive record of ownership under Cayman law.
Filing with General Registry:
While there is no public register of shareholders, the company is required to maintain its register at its registered office in the Cayman Islands.
Any change in directors or company secretary must be filed with the Cayman General Registry.
Issuance of shares itself is not filed with the Cayman General Registry (unlike in Singapore with ACRA), but accurate internal records are critical and may be subject to scrutiny in due diligence or legal proceedings.
Economic Substance and Reporting Requirements
While most early-stage technology startups are not subject to the Cayman Economic Substance regime, founders should remain informed:
The Economic Substance Act (2021 Revision) applies to companies conducting “relevant activities” such as banking, insurance, fund management, and IP holding.
If your company does not conduct relevant activities, it must still file an annual economic substance notification with the Cayman General Registry.
Failure to comply may result in penalties or administrative consequences even if the startup is pre-revenue.
Cayman companies should also consider Beneficial Ownership and Annual Return filings following the SAFE conversion, which are separate obligations under the regulatory framework.
Common Pitfalls in the Cayman Islands
Using an unmodified U.S. SAFE: Without adjusting for local law or M&A restrictions, the SAFE might be unenforceable or impractical to convert.
No share class defined: The SAFE must specify the share class to be issued. In most cases, this is “Series Seed Preferred Shares” or equivalent, pre-authorized or created during a financing round.
Not updating the register of members: Since there is no central shareholder registry, the internal register is the legal source of truth. It must be updated immediately upon any share issuance or conversion.
Omitting board authorization: Failing to pass a board resolution approving the issuance may make the conversion invalid under Cayman law.
Ignoring regulatory filings: Even if the company is inactive or early-stage, annual compliance filings are required. Non-compliance can cause administrative hurdles later.
One document. Countless deals.
FAQ
The exercise price of the shares under the FAST agreement will be determined at the time of issuance and will be included in the applicable Stock Purchase Agreement.
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