SAFE is a kind of warrant that gives investors the right to obtain shares of the company, usually preferred shares if and when there is a future valuation event (i.e. when the company collects “cheap” equity next year, is acquired or it files an IPO). The start-up (or another company) and the investor enter into an agreement. They negotiate things like: SAFE are instruments that function as an arrest warrant. In return for capital, the SAFEs recall the agreement reached with the investor that, after a subsequent cycle of equity financing, after a change of control over the company or the IPO of a company, the amount of the SAFE investment will be converted into equity. Although the function is similar, FAS differs from convertible bonds in that the amount invested under a SAFE is not a debt incurred or requires a monthly payment, and has no maturity date. SAFCes are not direct stakes in the company, but a promise that the amount of the investment will be converted into equity in the future. This aspect of FAS puts investors at a fundamental concern. Investors are not protected under public corporate or federal securities law, as would be the case with the issuance of equity, nor can they seek redress without fraud or other contractual remedies if SAFE is not converted. Mohsen Parsa, a los Angeles start-up lawyer, helps clients understand SAFE agreements, design comprehensive SAFE agreements for clients, and provide general guidance and guidance to these types of agreements so that startup clients can make the best short- and long-term decisions. Here`s a look at SAFE agreements and why they`re important to startups, but if you have specific questions about your SAFE agreements or how to conclude these types of agreements, contact Parsa Law, Inc.
If the business fails, the remaining money will be returned to the investors. If you are the founder, this does not mean that you must repay the money if the company fails. Responsibility lies with the company, not the founder. SAFE agreements are a relatively new type of investment created by Y Combinator in 2013. These agreements are concluded between a company and an investor and create potential future capital in the company for the investor in exchange for immediate money to the company. SAFE turns into equity in a subsequent funding cycle, but only if a specific trigger event (as described in the agreement) takes place. Some issuers offer a new type of security as part of some crowdfunding offers they have called safe. The acronym means Simple Agreement for Future Equity. These securities are risky and very different from traditional common shares. As the Securities and Exchange Commission (SEC) states in a new investor newsletter, despite its name, a SAFE offer cannot be “simple” or “safe.” In addition to the absence of an valuation requirement, such as convertible bonds, safe deal terms may include valuation caps and share price discounts to give equity investors (CFs) a lower price per share than subsequent investors or venture capitalists in this liquidity event.
This is fair, because previous investors take more risks than subsequent investors to pursue the same equity. Our updated safes are post-money safes. By “post-money” we say that the safe owner is measured by post, all the safe money is accounted for – which is now his own trick – but before (before) the new money in the price cycle that transforms and dilutes the coffers (normally series A, but sometimes the Seed series).