Simple Agreement For Equity In Illinois
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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.
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%.
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 agreement is a type of convertible instrument, but unlike debt instruments, SAFEs do not accrue interest or have a maturity date, making them an attractive fundraising option for early-stage startups.
When you draft an employment contract that includes equity incentives, you need to ensure you do the following: Define the equity package. Outline the type of equity, and the number of the shares or options (if relevant). Set out the vesting conditions. Clarify rights, responsibilities, and buyout clauses.
