Guam Simple Agreement for Future Equity (SAFE) is a legal instrument used in startup financing that allows early-stage companies to raise funds from investors in exchange for a right to acquire shares in the company at a future date. The SAFE agreement, popularized by Y Combinator, provides a simplified and flexible framework for investment, focusing on the valuation of the company at a later equity financing round. Under a Guam SAFE agreement, investors contribute capital to a startup, which is converted into shares in the future as specified in the agreement. This deferred equity issuance eliminates the need to determine the company's valuation at the time of investment, as the conversion happens when a qualified priced equity financing round occurs, typically involving venture capitalists or angel investors. There are different types of Guam SAFE arrangements that cater to various investment scenarios, including: 1. Traditional Guam SAFE: This type of agreement includes the essential provisions that set out the terms of the investment, conversion mechanics, and circumstances of triggering the equity conversion. It is ideal for simple and straightforward investment scenarios. 2. Valuation Cap Guam SAFE: The Valuation Cap SAFE includes an additional clause that sets a maximum pre-money valuation for the company at which the investor's investment will convert into equity. This provision protects the investor by ensuring they receive a predetermined equity stake regardless of the company's valuation at the next funding round. 3. Discount Guam SAFE: The Discount SAFE incorporates a discount rate that offers the investor favorable terms when converting their investment into equity. The discount rate allows the investor to acquire shares at a specified percentage lower than the price paid by the next-round investors, thus providing an immediate return on investment when the conversion takes place. 4. Most Favored Nation (MFN) Guam SAFE: The MFN SAFE ensures that the investor receives the best terms available to any future investors in subsequent equity financing rounds. If the company offers better terms, such as a lower valuation or higher discount rate, to subsequent investors, the original SAFE investor will automatically receive those improved terms as well. 5. Pro rata Rights Guam SAFE: Pro rata Rights Safes grant the investor the option to maintain their ownership percentage in future funding rounds by allowing them to invest an amount equal to their current ownership percentage. This provision prevents dilution and enables the investor to maintain their proportional equity stake as the company grows. In summary, Guam Simple Agreement for Future Equity (SAFE) is a flexible investment tool that allows startups to raise capital without determining their valuation at the time of investment. The different types of Guam SAFE agreements cater to various investor preferences and provide provisions such as valuation caps, discounts, most favored nation clauses, and pro rata rights to protect the investors' interests.
Guam Simple Agreement for Future Equity
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How to fill out Simple Agreement For Future Equity?
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FAQ
Suppose a SAFE is issued with a 20% discount. This means if the SAFE investor invested $40,000 in a startup whose price per share at the time of future investment comes out to be $10, he'll get the share at a 20% discounted price, which is $8. This means he'll get 5000 shares instead of 4000.
Cons: SAFE investors assume most, if not all, of the risk, in that there is no guarantee of any equity ownership in the company. ... A SAFE holder is not entitled to any company assets in the event of a liquidation.
One of the primary reasons why entrepreneurs should never give up equity in their startup is that it can significantly dilute their ownership stake. When equity is given away, the founders ownership share is reduced and they may no longer have majority control over their company.
How Much Equity Should I Give Up in Series A? In a series A round, founders are advised to give up around 20-25% of equity to investors. These equity investments are often dependent on the kind of startup or business. Some businesses may give up more, while others must give out less equity.
Conventionally, the general guiding principle for a startup is that when giving equity to investors in exchange for their money in your startup, the equity should be somewhere between 10-20% of total equity. Giving more than that to an investor is too much, which is risky for your business.
If you started as a solo-founder and have made progress on the business (especially if you've already raised), you should consider a something along the line of an 80/20 split of founder shares. In fact, the range I'm seeing is anywhere from 5-20% for the 2nd co-founder.
Realistically, you should expect to give away between 10% and 25% at this point. This round is all about getting the necessary funding to build your product, to figure out your product-market fit, and to search for that scalable growth channel.
How Much Equity Should be Given Away in a Seed Round? A general rule of thumb is giving away between 10-20% equity during a seed round. This may likely be to angel investors who are willing to put in checks right at the origin of a company during the early stages.