What Is Simple Agreement for Future Equity

Our first vault was a “pre-money” vault, as startups raised smaller amounts of money at the time of its launch before raising a low-cost financing round (usually a Round of Series A Preferred Shares). The safe was an easy and quick way to get the first money in the company, and the concept was that the owners of safes were only the first investors in this future price round. But early-stage fundraising evolved in the years following the introduction of the original vault, and now startups are raising much larger sums of money than the first round of “seed” funding. Although safes are used for these boot rounds, these rounds are really best seen as completely separate financing and not as “bridges” to later price rounds. In addition, a SAFE can remain on hold indefinitely, which would prevent the investor from making a profit from the investment. Since SAFERs are designed to convert only when certain specified events occur, an investor must analyze the risk that the events will not occur given the circumstances of the business. If a company generates enough capital not to require additional equity financing rounds, the amount invested in a vault can never be converted into equity. However, when a SAFE deal goes smoothly, investors` rights are usually more important than those of common shareholders. Therefore, SAHE offers preferential rights that are extremely attractive to experienced investors. SAFE agreements are powerful investment tools.

However, there are important terms in SAFE agreements that you need to understand. The five terms we will examine in this article include rebates, valuation caps, pre-money or post-currency, pro-rata rights, and the determination of the most favored nations. A SAFE instrument is similar to a convertible bond in that it gives a particular investor rights for future shares in a company, but it is considered a more favorable alternative to the founders. In particular, since there are no maturity dates or accrued interest, founders can focus on growing their business without the stress of debt or financing periods that convertible bonds can cause. If you have any questions about simple agreements for future shares or other equity financing issues, lawyers from Parker McCay`s corporate and corporate lending departments are at your disposal. Once the terms are agreed and the SAFE has been signed by both parties, the investor sends the agreed funds to the company. The Company will apply the funds in accordance with all relevant conditions. The investor does not receive equity (SAFE Preferred Share) until an event listed in the SAFE Agreement triggers the conversion.

It`s a challenge to evaluate a startup at the beginning of its creation. SAFE agreements solve this problem. They allow you to delay the valuation until a later date, while having the opportunity to invest or raise capital. SAFERs solve two problems: (1) no one knows what a company is worth in the early stages, and (2) no one wants to spend a lot of time and money creating elaborate investment documents. A SAFE moves the question of valuation so you can continue even if the founder and investor have completely different ideas about what the company is worth. The SAFE is a short standard document that can be created easily and cheaply. SAFERs are converted into equity when an agreed “trigger event” occurs. Typical events include qualified equity financing, a liquidity event (sale or IPO) or a merger. SAFE is worthless if the company goes bankrupt or if the triggering events never occur.

The usual trigger is a future investment in qualified shares, in which case the SAFE investor receives the same type of shares as future investors (usually preferred shares). At the end of 2013, Y Combinator published the investment vehicle Simple Agreement for Future Equity (“SAFE”) as an alternative to convertible bonds. [2] This investment vehicle has since become popular in the United States and Canada[3] due to its simplicity and low transaction costs. However, as usage increases, concerns have arisen about the potential impact on entrepreneurs, particularly if multiple SAFE investment rounds are conducted prior to a low-cost round[4], as well as potential risks for unauthorised crowdfunding investors who could invest in SAFE companies that, realistically, never receive venture capital funding and therefore will never trigger a conversion into equity. [5] Another feature is the “pro-rated cover letter”. This gives the SAFE investor the right to make an additional investment in future towers. It`s good for the investor. But from a company`s perspective, pro-rated rights can sometimes be a problem if future investors want to have the future for themselves. This potential problem can be exacerbated if the company has granted pro-rated rights to several SAFE investors. Companies should generally view SAFERs as a long-term liability.

The reason safe contract accounting works this way is that it forces startups to deliver an unknown number of future stocks at an undisclosed price. Therefore, it is impossible to set more definitive figures and apply performance counters. Here is an article about SAFE agreements. A discount rate gives the SAFE investor a discount on what future investors pay for equity at the time of the triggering event. This is a discount on the future selling price. A discount rate of 85% means that the SAFE investor receives his future equity for 85% of what future investors pay, which rewards him for the early investment. A SAFE is an agreement between an investor and a company that grants the investor rights to the company`s future equity similar to a warrant, unless a certain price per share (or valuation) is set at the time of the initial investment. They negotiate things like valuation limits, discounts, maturity date and investment amounts. SAFERs are tools that work in the same way as an arrest warrant.

In return for the capital, the SAFE recalls the agreement with the investor that in a subsequent equity financing round, in the event of a change in control of the company or an IPO of a company, the amount of the SAFE investment will be converted into the company`s own funds. Although similar in function, SAFE Differs from Convertible Debentures in that the amount invested under a SAFE is not debt that accrues interest or requires a monthly payment or maturity date. .

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