Purpose Of Simple Agreement For Future Equity

In addition to the absence of an valuation requirement, such as convertible bonds, safe deal terms may include valuation caps and share price discounts to give equity investors (CFs) a lower price per share than subsequent investors or venture capitalists in this liquidity event. This is fair, because previous investors take more risks than subsequent investors to pursue the same equity. A „SAFE“ is an agreement between an investor and an entity that grants the investor rights to the company`s future equity, which are similar to a share warrant, unless a certain price per share is set at the time of the initial investment. The SAFE investor receives future shares in the event of an investment price cycle or liquidity event. SAFEs are supposed to offer start-ups a simpler mechanism to apply for upfront financing than convertible bonds. A largely erroneous belief is that SAFes are standardized. Although YCombinator, the seed accelerator that created SAFEs, has published standardized versions of the agreements on its website, these documents can and will be modified by issuers. A lawyer is in the best position to check SAFE to advise the investor on the effects of the specific document, for example.B. (1) conversion conditions, including the amount and conditions of conversion and probability of conversion; (2) the company`s repurchase rights and whether the company may be able to prevent the conversion of the investment in exchange for the investor`s purchase of SAFE; (3) dissolution rights in the event of a bankruptcy filing of the company prior to the transformation; and (4) voting rights, if they exist, are granted to the investor. Some issuers offer a new type of security as part of some crowdfunding offers they have called safe. The acronym means Simple Agreement for Future Equity. These securities are risky and very different from traditional common shares.

As the Securities and Exchange Commission (SEC) states in a new investor newsletter, despite its name, a SAFE offer cannot be „simple“ or „safe.“ In addition, a SAFE may be on hold indefinitely, which would prevent the investor from making a profit from the investment. Since FASCs should only be converted in the event of specific events, an investor should analyze the risk that events will not occur in light of the company`s circumstances. If an entity generates enough capital not to require additional capital financing cycles, the amount invested under SAFE can never be converted into equity. SAFE is a kind of warrant that gives investors the right to obtain shares of the company, usually preferred shares if and when there is a future valuation event (i.e. when the company collects „cheap“ equity next year, is acquired or it files an IPO). Unlike the converted debt, there is no debt with a SAFE. There is also no maturity date, which means that investors have to wait indefinitely before they can get their hands on the equity they have purchased, if they do. SAFS are instruments that function as an arrest warrant. In return for capital, the SAFEs recall the agreement reached with the investor that, after a subsequent cycle of equity financing, after a change of control over the company or the IPO of a company, the amount of the SAFE investment will be converted into equity. Although the function is similar, FAS differs from convertible bonds in that the amount invested under a SAFE is not a debt incurred or requires a monthly payment, and has no maturity date.