Mohsen Parsa, a startup lawyer in Los Angeles, helps clients understand SAFE agreements, draft comprehensive SAFE agreements for clients, and provide general advice and guidance on these types of agreements so that early-stage clients can make the best decisions in the short and long term. Here`s an overview of SAFE deals and their importance to startups, but if you have specific questions about your SAFE deals or how to enter into these types of deals, contact Parsa Law, Inc. Y Combinator released the Simple Agreement for Future Equity (”SAFE”) investment vehicle as an alternative to convertible bonds in late 2013. [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 use has become increasingly common, concerns have arisen about its potential impact on entrepreneurs, particularly when multiple SAFE investment cycles are conducted prior to an assessed 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] As the company grows, it is likely to raise additional capital and subsequently increase in value. It is this result that investors are trying to achieve. The SAFE deal will be converted into shares of the company when new investors hold price rounds in the future. For example, if you have a 20% discount and a valuation cap of $3 million. Invest USD in a startup and a future investor gets a 30% discount, you will automatically get the 30% discount. SAFERs allow a company to receive cash without the legal fees typically associated with traditional convertible bonds or capital increases. They usually contain provisions detailing how the premium can be converted into a future stake in the company, often at a discount to what other investors would have to pay. These provisions are typically triggered by defined conversion events, such as .
B future capital increases or acquisitions by another company. Here`s a more in-depth look at safe agreements versus . Convertible bonds below: SAFE deals, also known as simple deals for future stocks and SAFE bonds, are legal contracts that startups use to raise seed capital and are similar to a warrant. They are an alternative to convertible bonds and KISS notes and were introduced by Y Combinator in 2013. The terms of safe agreements determine the relationship between the startup and the investor in terms of participation rights to trigger liquidity events. Pre-money, or post-money, refers to valuation metrics that help investors and founders understand the value of a business. This is one of the most important terms of a SAFE agreement. Pre-money means that the valuation is ahead of the money of new investors. Post-money means that the valuation includes the capital raised in this round. 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 the applicable conditions. The investor does not receive equity (SAFE Preferred Share) until an event listed in the SAFE Agreement triggers the conversion.
SAFES also act as a stand-alone tool that works with other SAFE agreements that will be acquired by new investors in the future at different times and amounts. Convertible bonds can be structured as stand-alone bonds or in series. As a startup, you undoubtedly go through deals after deals 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 created equal. Even though the FASB has not yet published a specific standard on this topic, it is enough to assume that SAFERs will continue to be an attractive form of financing as long as companies look for easy ways to finance their activities. However, until a standards committee gets involved, it is up to the individual companies that offer SAFERs to evaluate the rewards on a case-by-case basis. While there may be clear benefits for financial statements in classifying SAFE premiums as equity as opposed to a liability, an entity must be careful to consider the details of the instruments it issues. 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. In some quarters, SAFE arrangements are superior to convertible bonds simply because they are not debts. Therefore, investors don`t have to worry about interest rates and maturity dates. Convertible bonds, on the other hand, contain both elements. One of the easiest (and cheapest) ways to invest in a start-up business is often a simple agreement for future equity (SAFE). SAFERs are easy to use and do the job with minimal cost and can work for both individual investors and investor groups. Some SAFERs involve or are linked to a share repurchase obligation that requires the issuer to settle through a transfer of cash or other assets and, as such, are considered a liability of the issuer. Instruments that allow the investor to receive shares of the Company in exchange for cash or other assets, even if only for certain contingencies, and that are related to the Company`s share price, are generally also liabilities. In addition, SAFERs often include a conditional obligation related to a company`s shares that requires the issuing company to transfer cash or other assets to certain contingencies.
These events may include a liquidity event or a capital increase, which may result in a possible classification of liabilities and recognition at market value. A SAFE is a cash investment in exchange for a contract that gives the investor the right to convert the investment into future shares. A SAFE is not a loan: there is no interest rate, no payments and no due date. A SAFE is not capital: it is not ordinary or preferred shares and does not give voting rights or other equity rights under state laws. The investor invests money and the company signs a three- to five-page SAFE contract that gives it certain rights. Let`s say you invest $25,000 under a SAFE deal. Since assigning a valuation to early-stage companies makes almost no sense, the startup will use its SAFE agreement to find new investors to postpone the valuation to a future event. Investors simply buy the right to equity in the future if the startup has more traction and performance data that would allow an institutional investor to properly evaluate the startup. At that time, your $25,000 would be converted into shares relative to the valuation of the rated round. Early investors typically benefit from risk that includes discounts and valuation caps.
The start-up (or another company) and the investor enter into an agreement. They trade things like: In a May 2017 investor bulletin, the Securities and Exchange Commission (SEC) warns investors about SAFE: ”The most important thing you need to know about SAFE Is that you don`t get a cash stake in return. SAFERs are not common shares. The SEC makes it clear to investors and other companies wishing to make this type of financing that it is not automatically equity. Nowhere in the article does the SEC state that a SAFE is a liability or a capital, but quickly realizes that SAFES are not traditional stocks. Simple Agreement for Future Equity (SAFE) has become an attractive way for companies, usually startups or early-stage companies, to raise funds profitably. But contrary to what its name suggests, charging prices has proven to be anything but easy. At present, the Financial Accounting Standards Board (FASB) has not issued specific guidelines for the accounting of SAFERs, which has led to some divergence on how SAFERs should be accounted for at the time of issuance. .