Mohsen Parsa, a los Angeles start-up lawyer, helps clients understand SAFE agreements, design comprehensive SAFE agreements for clients, and provide general guidance and guidance to these types of agreements so that startup clients can make the best short- and long-term decisions. Here`s a look at SAFE agreements and why they are important to startups, but if you have specific questions about your SAFE agreements or how to enter into these types of agreements, contact Parsa Law, Inc. Unlike 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. Unlike a convertible loan, a SAFE is not a loan; It`s more like an arrest warrant. In particular, no interest or due date is paid and SAFes are therefore not subject to the rules under which debts may be in many jurisdictions. This simplicity is the main motivation of a SAFE. „Safes should work in the same way as convertible notes, but with fewer complications,“ says startup accelerator Y Combinator. Our first safe was a „pre-money“ safe, because at the time of its launch, startups collected smaller sums of money before collecting a funding cycle (typically a Preferred Stock Round Series). The safe was a quick and simple way to get the first money into the business, and the concept was that safe owners were only early investors in this future price cycle. But fundraising, staged early on, grew in the years following the introduction of the initial safe, and now startups are raising far more money than the first „seeds“ funding cycle.
While safes are used for these seed rounds, these towers are really better regarded as totally separate financing, instead of turning „bridges“ into subsequent price cycles. The exact conditions of a SAFE vary. However, the basic mechanics are that the investor makes available to the company a certain amount of financing at the time of signing. In return, the investor will later receive shares in the company in connection with specific contractual liquidity events. The main trigger is usually the sale of preferred shares by the company, usually as part of a future fundraising cycle. Unlike direct equity acquisition, shares are not valued at the time of SAFE signing. Instead, investors and the company negotiate the mechanism with which future shares will be issued and defer actual valuation. These conditions generally include an entity valuation cap and/or a discount on the valuation of the shares at the time of triggering. In this way, the SAFE investor participates above the company between the signing of safe (and the financing provided) and the triggering event. As the security of a single flexible document without many trading conditions, start-ups and investors save money in legal fees and reduce the time spent negotiating investment terms.
Startups and investors generally have only one point to negotiate: the valuation cap. Since a safe does not have an expiry date or maturity date, no time or money should be spent on extending maturities, reviewing interest rates or otherwise. 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. At the end of 2013, Y Combinator published the Simple Agreement for Future Equity („SAFE“) as an alternative to