The SAFE is a kind of warrant that gives investors the right to obtain shares of the company, usually preferred shares, if and if there is an upcoming valuation event (i.e. the next time the company increases, acquires “valued” equity or submits an IPO). A general misunderstanding is that SAFEs are standardized. Although YCombinator, the seed accelerator that created SAFEs, publishes standardized versions of the agreements on its site, these documents can and are modified by issuers. A lawyer is best placed to verify the SAFE in order to inform the investor of the effects of the specific document, such as: (1) the conditions of conversion, including the amount and conditions of conversion and the likelihood of such conversion; (2) the company`s buy-back rights and the company`s possible ability to prevent the conversion of the stake in exchange for the takeover of SAFE from the investor; (3) any rights of dissolution in the event of bankruptcy of the company before the conversion; and (4) the voting rights, if any, granted to the investor. In addition, a SAFE can be suspended indefinitely, which would prevent the investor from profiting from the investment. Since it is only designed for the occurrence of certain specified events, an investor must analyze the risk that the events will not occur in light of the circumstances of the business. If a company generates enough capital not to need additional equity funding cycles, the amount invested under SAFE can never be converted into equity. Y Combinator, a well-known technology accelerator, created the SAFE rating (simple agreement for future equity) in 2013 and uses it to fund most of the Seed phase startups participating in its three-month development meetings. Since 2005, Y Combinator has funded more than 1,000 startups, including Dropbox, Reddit, WePay, Airbnb, and Instacart. The startup (or any other company) and the investor enter into an agreement.
You negotiate things like: As a start-up, you undoubtedly go through agreements with other companies, suppliers, contractors, investors and many others. A lesser-known agreement is the Simple Agreement for Future Equity (SAFE). These agreements can be important for a startup`s success, but not all SAFE agreements are the same. Outside of Y Combinator, SAFE is reviewed and used by startups in crowdinvesting markets. In 2020, the number of non-convertible bonds (e.g. B covered bonds and SISS) used by pre-financing undertakings is as high (58%) as the number of convertible bonds issued. Since companies get to know safe better in the beginning, this relatively young stock might have found its ideal niche in Title III offerings, also known as crowdinvesting for all investors. In addition to the absence of valuation requirements, such as convertible bonds. B the terms of the SAFE arrangement may include valuation caps and share price discounts in order to offer a lower price per share than subsequent venture capital (VVC) investors or acquirers at that liquidity event.
This is fair, because previous investors take more risks than later investors by pursuing the same equity. The exact conditions of a SAFE vary. However, the basic mechanism is that the investor provides specific financing to the company when it is signed. In return, the investor will subsequently receive shares of the company related to certain contractual liquidity events. The primary trigger is usually the sale of preferred shares by the company, typically as part of a future price increase cycle. Unlike a direct share purchase, shares are not valued at the time of signing the SAFE. Instead, investors and the company negotiate the mechanism by which future shares will be issued and postpone the actual valuation. These conditions typically include a valuation cap for the company and/or a discount on the valuation of shares at the time of the triggering event.
. . .