Simple Agreement For Future Equity Analysis

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. 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). To understand what a SAFE is, it is also important to know what it is not. It is not a debt instrument. Nor are they common shares or convertible bonds. However, SAFe`s convertible bonds are similar in that they can provide equity to the investor in a future preferred share cycle and include valuation caps or discounts. However, unlike convertible bonds, FAS has no interest and no specific maturity date and, in fact, can never be triggered to convert SAFE into equity. At the end of 2013, Y Combinator published the Simple Agreement for Future Equity (“SAFE”) investment instrument as an alternative to convertible debt. [2] This investment vehicle is now known in the U.S. and Canada because of its simplicity and low transaction costs.

However, as use is increasingly frequent, concerns have arisen about its potential impact on entrepreneurs, particularly where several SAFE investment cycles take place prior to a private equity cycle[4] and potential risks to un accredited crowdfunding investors who could invest in the SAFes of companies that realistically, never receive venture capital financing and therefore never convert to equity. [5] Once the terms have been agreed and the SAFE is signed by both parties, the investor sends the agreed funds to the company. The entity uses the funds in accordance with the applicable conditions. The investor receives equity (SAFE preferred shares) only when an event mentioned in the SAFE agreement triggers the conversion. At Dorm Room Fund, we invest with unlimited SAFEs at no discounts, but with an MFN clause. This means that when converted into equity, founders end up having more of the business than if there was a cap or discount. If new investors buy shares for $1.00, it`s also Dorm Room Fund. With participation rights or participation rights, investors can invest additional funds to maintain their ownership during equity financing after the financing that initially converted SAFE into equity. If the investor exercises pro-rata rights, he pays the new price of the round and not the price he paid during the first safe transformation. SAFE agreements are a relatively new type of investment created by Y Combinator in 2013.

These agreements are concluded between a company and an investor and create potential future capital in the company for the investor in exchange for immediate money to the company. SAFE turns into equity in a subsequent funding cycle, but only if a specific trigger event (as described in the agreement) takes place. Another new function of the safe concerns a “prorgula” right. The original safe required the company to allow holders of safes to participate in the financing round after the financing round in which the safe was converted (for example. B if the safe is converted into series group preferred actuators, a secure holder – now holder of a Series A preferred share subseries – is allowed to acquire a proportionate portion of the Series B preferred share). Although this concept is consistent with the original concept of a safe, it is