Another feature is the “pro-rated cover letter”. This gives the SAFE investor the right to make an additional investment in future towers. It`s good for the investor. But from a company`s perspective, pro-rated rights can sometimes be a problem if future investors want to have the future for themselves. This potential problem can be exacerbated if the company has granted pro-rated rights to several SAFE investors. 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 new vault does not change two basic features that we believe will remain important for startups: A SAFE is an agreement between you, the investor and the company, in which the company usually promises to give you a future stake in the company if certain triggering events occur. Not all SAFEEs are created equal and the very important conditions of when you can obtain future equity may vary between the SAFERs offered in different crowdfunding offers. Despite its name, a SAFE may not be “easy” or “secure”. At the end of 2013, Y Combinator published the investment vehicle Simple Agreement for Future Equity (“SAFE”) as an alternative to convertible bonds.
[2] This investment vehicle has since become popular in the United States and Canada[3], due to its simplicity and low transaction costs. However, as use has become increasingly common, concerns have arisen about its potential impact on entrepreneurs, particularly when multiple SAFE investment cycles are conducted prior to an assessed round[4], as well as potential risks for unauthorised crowdfunding investors who could invest in safe companies that, realistically, never receive venture capital funding and therefore will never trigger a conversion into equity. [5] Although the safe may not be suitable for all financing situations, the conditions must be balanced, taking into account the interests of the start-up 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. SAFE agreements may include a discount. The discount is used when the SAFE investor`s money is converted in future funding rounds and the valuation was at or below the valuation limit. For example, a 20% discount rate means that an investor`s money would buy shares at a valuation of $8 million if the price round is $10 million (20% discount). A SAFE is a cash investment in exchange for a contract that gives the investor the right to convert the investment into future shares. A SAFE is not a loan: there is no interest rate, no payments and no due date. A SAFE is not capital: it is not ordinary or preferred shares and does not give voting rights or other equity rights under state laws.
The investor invests money and the company signs a three- to five-page SAFE contract that gives it certain rights. Whether you are using the vault for the first time or are already familiar with vaults, we recommend that you read our Secure User`s Guide (which replaces the original vault primer). The Safe User`s Guide explains how the vault converts, with sample calculations as well as additional details about the proportional secondary letter, explanations of other technical changes we have made to the new vault (e.g. tax treatment) and suggestions for optimal use. Thus, a SAFE investor could choose to invest $50,000 with a valuation cap of $1 million to get five percent of the company. If the value has increased to $5 million at the time of the triggering event, the SAFE investor would only receive one percent if there is no valuation cap. The numbers are subject to some nuances regarding the amount of future equity investment to explore in a future blog post. Our updated safes are therefore “post-money” safes. By “post-money” we mean that the possession of the safe holder 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 seeds in series). In our opinion, the post-money safe has a great advantage for founders and investors – the ability to immediately and accurately calculate the amount of ownership of the company that 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. 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 has no expiration or maturity date, no time or money should be spent to extend terms, revise interest rates, etc. There are four versions of the new post-money safe as well as an optional cover letter. 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 move on, even if the founder and investor have very different ideas about what the company is worth. The SAFE is a short standard document that can be created easily and cheaply. Here is an article about SAFE agreements. .