Companies should always account for SAFERs as a long-term liability. The reason for settling SAFE deals in this way is that you require startups to deliver an unknown number of future shares at an undisclosed price. Therefore, it is impossible to obtain more definitive performance counters. The relative speed of SAFE agreements allows them to act as a standardized arrangement. In short, they are structured more similarly from one investment to another. Convertible bonds, on the other hand, come in many forms, which increase the flexibility of investment. The Security and Exchange Commission (SEC) also warns that investors should be cautious when using SAFE agreements. Although they can be easily structured, you need to remember that they are not all created in the same way. In addition, it can never happen that liquidity events are triggered. Here`s a more in-depth look at SAFE arrangements versus convertible bonds below: Overall, a SAFE can be a wonderfully simple tool that can be used to raise funding at an early stage.
The key, for both founders and investors, is to understand what you`re using and get good advice as you use it. As the examples in this article show, there are some complexities of the “simple” agreement that can be solved, but usually require some foresight. Without properly considering these questions in advance, you can suddenly convert multiple SAFE, each with different terms, right next to the tipping point between using a discount and a valuation cap, without a clear path to the future, which is the opposite of the goal of using a SAFE. It should also be noted that SAFE deals are advanced, high-risk tools that may never be converted into stocks. They don`t incur interest, and startups don`t have to repay investors if they fail. The risk and tolerance of SAFE arrangements contrast with those of convertible bonds. Investors may not be familiar with convertible bonds or may feel uncertain about the tax implications of the SAFE agreement. The standard for simple and flexible investment instruments are convertible bonds. As an example of a valuation cap used for conversion, let`s say we have a SAFE investment of $500,000 with a valuation cap of $5,000,000. In the event of a conversion, the SAFE investor receives shares at the same value as the equity investor (the investor(s) whose investment triggers the conversion), with the valuation cap acting as a safety barrier to prevent the SAFE investor from converting this price.
The valuation cap is currently based on the initial value of the equity financing, which means that if the equity financing has an initial valuation of $2,000,000, the SAFE investor`s investment is included in that amount, which, in our example, means that the SAFE investor would hold 25% of the issued and outstanding shares immediately prior to the closing of the investment. 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. Even if the safe is not suitable for all financing situations, the conditions must be balanced, taking into account the interests of the startup and investors. As with the original safe, there are still trade-offs between simplicity and completeness, so while not all on-board cases are covered, we believe the vault covers the most relevant and common issues. Both parties are encouraged to ask their lawyers to check the vault if they wish, but we believe it provides a starting point that can be used in most situations without changes. We hold on to this belief because we`ve seen hundreds of companies first-hand each year and helped them raise funds, as well as the thoughtful feedback we`ve received from founders, investors, lawyers, and accountants with whom we`ve shared the first drafts of the post-money vault. Atilla Z. Baksay is a Colorado-based lawyer who practices corporate and transaction law and securities regulation.
Atilla represents clients in the negotiation and drafting of transaction contracts (e.B. executive service, purchase and sale, licensing, ip and SaaS agreements) and corporate agreements (e.B. Restricted share transfers, stock option plans, convertible bonds/SAFE/SAFT agreements, articles of association/operating agreements, loan agreements, personal guarantees and security contracts), internal documents (e.B. Employment policies, separation agreements, employment/independent contractor/consultant contracts, B. NDA, brokerage relationship policies and office policy memoranda) and digital policies (. B for example, Terms of Use, Privacy Policy, CCPA Notice, and GDPR Notice). Atilla also reviews and provides legal advice on the security status of digital currencies and assets. After studying law, Atilla practiced international trade law at the Executive Office of the President, Office of the U.S. Trade Representative, where her practice included $500 billion worth of economic sanctions against goods from the People`s Republic of China. .