When it comes to a SAFE investment, three key terms need to be negotiated: triggering events, valuation cap and discount. Not all SAFERs are the same. Getting the right terms can make or lose a lot of money for investors and businesses. A good startup lawyer can help you navigate these key terms. Here`s what these key terms mean: Let`s say you invest $25,000 as part of 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 equity compared to the valuation of the price round. Early investors typically benefit from taking a risk that includes discounts and valuation caps. As a flexible, single-document security with no many conditions to trade, Safes allows startups and investors to save money on legal fees and reduce the time it takes to negotiate investment terms. Startups and investors usually only need to negotiate one point: the valuation cap. Since a vault does not have an expiration or maturity date, no time or money should be spent to extend maturity dates, revise interest rates, etc.
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. The new vault doesn`t change two basic features that we believe will remain important for startups: our updated vaults are therefore “post-money” vaults. By “post-money” we mean that the ownership of safe holders is measured after (post) all the safe money has been settled – which is now a separate round – but always before (before) the new money in the price round that converts and dilutes the safes (usually the A series, but sometimes the Seed series). The post-money vault has what we think is a huge advantage for founders and investors – the ability to instantly and accurately calculate how much of the company`s property has been sold. It`s crucial for founders to understand how much dilution is caused by each vault they sell, just as it`s fair for investors to know how much of the company`s property they bought. To understand what a SAFE is, it is also important to know what it is not. It is not an instrument of debt. Nor are they common shares or convertible bonds. However, SAHE`s convertible bonds are similar in that they can provide equity to the investor in a future series of preferred shares and may include valuation caps or haircuts.
However, unlike convertible bonds, SAFERs do not pay interest and do not have a specific maturity date and, in fact, can never be incentivized to convert SAFE into shares. The start-up (or another company) and the investor enter into an agreement. They negotiate things like: SAFERs solve two problems: (1) no one knows what a company is worth in the early stages, and (2) no one wants to spend a lot of time and money creating elaborate investment documents. A SAFE moves the question of valuation so you can continue even if the founder and investor have completely different ideas about what the company is worth. The SAFE is a short standard document that can be created easily and cheaply. 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 debentures, on the other hand, contain both elements.
SAFE agreements are powerful investment tools. However, there are important terms in SAFE agreements that you need to understand. The five terms we will examine in this article include rebates, valuation caps, pre-money or post-currency, pro-rata rights, and the determination of the most favored nations. However, when a SAFE deal goes smoothly, investors` rights are usually more important than those of common shareholders. Therefore, SAHE offers preferential rights that are extremely attractive to experienced investors. A seed investor takes a lot of risk from the beginning. This risk is not rewarded if the investor is not allowed to invest with other people until later, when the company has more value. A valuation cap solves this problem for the investor.
A valuation cap sets a maximum enterprise value to determine the percentage of equity the investor receives. .