Simple Agreement For Future Equity Example For Company In Contra Costa
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A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.
For instance, SAFEs typically do not include provisions for debt repayment in the event of company liquidation, leaving investors with little to no recourse if a startup fails. This lack of security can deter investors who are risk-averse or those who prefer to have some form of downside protection.
A SAFE is an investment contract between a startup and an investor that gives the investor the right to receive equity of the company on certain triggering events, such as a: Future equity financing (known as a Next Equity Financing or Qualified Financing), usually led by an institutional venture capital (VC) fund.
The primary benefit of investing in a Safe is the enhanced security it offers. Home safes are designed to withstand various threats, including burglary, fire, and water damage.
Simplicity and Efficiency: SAFEs are straightforward with fewer terms to negotiate than a convertible note, making them less complicated and time-consuming than convertible notes. This simplicity is highly attractive for startups and investors looking to save time and legal costs.
Because Safes have no maturity date, the traditional critique is that investors can end up in 'no mans' land if the company fails to secure additional financing (thus Safe holders have no option to convert or receive back principal - they just sit there with their SAFE indefinitely).
They are accounted for as equity on the balance sheet. When the Simple Agreement for Future Equity converts to preferred stock, the accounting entries are that the SAFE entry is removed and the amount is credited to preferred equity (ignoring any APIC implications).
For example, if a SAFE has a valuation cap of $10 million, and your startup's next financing round values the company at $15 million, the SAFE investor's equity will be calculated based on the $10 million cap, not the $15 million valuation.
How to negotiate a SAFE agreement Understand the terms and conditions. Create a term sheet that outlines the conditions you're willing to accept and those you want to negotiate. Align interests with investors. Find investors who offer more than just capital. Come in with a plan. Focus on building relationships.
The Discount Rate is calculated as 100% minus the percent discount the SAFE investors are entitled to. For example, if SAFE investors are entitled to a discount of 20% (they can buy Standard Preferred Stock 20% cheaper than subsequent investors), the Discount Rate is 80% = 100% - 20%.
