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Publication date: 19.08.2024
I am studying in the third year of the State University of Economics and Technology.I specialize in contractual, economic and corporate law, in particular, I provide consultations and write articles.
A SAFE (Simple Agreement for Future Equity)
A SAFE (Simple Agreement for Future Equity) is a type of financing agreement often used in early stage startups to attract investment.
Here are the main points to know about SAFE:
- How it works: An investor provides money to a company, and in return receives the right to receive shares in the future when the company passes the next round of financing (for example, conducts a round of venture capital financing or carries out an IPO).
- Terms: The terms of a SAFE may include discounts on the share price for the investor to be offered in the next round of financing, or a specified valuation of the company that limits the amount of capital that will be provided in exchange for the SAFE.
- Payments: SAFE does not provide for regular payments or interest rates. The investor is not entitled to dividends or other benefits until the SAFE is converted into shares.
- Conversion: Conversion of a SAFE into shares occurs upon the next round of financing or upon liquidation of the company. Conversion terms usually include an option to exchange the investment for shares at a special price or within a certain limit.
- Advantages: For startups, SAFE simplifies the process of attracting capital, because it does not require complex legal contracts and does not give investors the right to vote or share in the company at the stage of concluding the deal. SAFE allows investors to benefit from the potential growth of the company's value.
- Risks: SAFE is risky for investors because there is no guarantee that the company will be able to successfully raise a further round of financing or go public, and the investor may be left without the invested funds.
Legal aspects of the SAFE contract:
SAFE (Simple Agreement for Future Equity) may have different terms depending on the specific agreements between the startup and the investor. Here are some key aspects and variations that can be considered in a SAFE contract:
Question
What investment format can be chosen?
Answer
The most common format, where the investor provides money, which is usually transferred to the company's account. SAFE can be used to evaluate other forms of support, such as the provision of production facilities, participation in project development, team resources, etc. In such a case, the assessment of these resources should be clearly defined.
Question
How does the conversion process work?
Answer
When a company raises a new round of financing, the SAFE is converted into shares based on agreed terms (valuation or discount). The investor receives shares under his SAFE, which can give him a significant stake in the company. If the company is liquidated or exits (sale, merger), SAFE may provide for certain terms of payment or conversion into shares.
The procedure for concluding a SAFE contract:
The procedure for concluding a SAFE (Simple Agreement for Future Equity) contract may differ depending on the specific terms of the agreement, but generally includes the following stages:
- Preliminary negotiations and evaluation: The startup and the potential investor conduct a preliminary evaluation of the business project to determine its potential, risks and needs. Key terms of the deal are discussed, such as the company's valuation (valuation cap), discount on shares, size of investment, form of investment (money, resources, etc.).
- Preparation of documentation: The legal advisor or startup team prepares a draft of the SAFE agreement. This is a standard document, but it can be adapted according to the specific terms of the agreement. Verification of the legal status of the company, its corporate documents, the status of shares, intellectual property rights and other important aspects.
- Drafting of the agreement: The investor and the startup conduct a review and discussion of the draft SAFE agreement, make the necessary changes and clarifications. After reaching agreement on all terms, the parties sign the SAFE contract. The signature can be done electronically or in paper form.
- Making an investment: The investor transfers the stipulated amount to the company's account or provides another form of support as specified in the contract (for example, resources, services). The startup confirms the receipt of the investment and provides the investor with the necessary documents that confirm the execution of the agreement.
- Monitoring and reporting: The startup provides the investor with regular reports on the company's financial condition and development in accordance with the terms of the contract. If there are changes that may affect the terms of the SAFE or the business company, the startup must notify the investor.
- SAFE Conversion: The SAFE is converted into shares of the company during the next round of financing, sale of the company, or other event provided for in the agreement. According to the terms of the contract, the SAFE is converted into shares of the company at a specified price or with a discount.
- Completion of the transaction: After converting the SAFE into shares, the investor receives his share in the company. The SAFE Agreement is deemed to have been executed, and further rights and obligations are determined in accordance with the new shareholder agreements. The startup and the investor must consider the legal and tax implications of the deal. This may include consulting with tax advisors to determine tax liability.
This procedure provides structure and clarity to the SAFE contracting process, helping both parties reach an agreement that meets their needs and expectations.
Legal assistance when concluding a SAFE contract:
Lawyer services is important when entering into a SAFE (Simple Agreement for Future Equity) for several reasons. A lawyer can ensure the correctness and legality of the contract, avoid potential risks and protect the interests of both parties. Here are the types of legal services at various stages of concluding a SAFE contract:
Lawyer consultation and legal analysis of the situation: lawyers online conduct an analysis of the business plan and strategic goals of the startup and the investor to understand the context of the deal and its potential legal consequences. The lawyer's services help define the key terms of the SAFE contract, such as the company's valuation cap, discount, and conversion mechanisms.
Legal services for the preparation of documentation: The lawyer help prepares a draft of the SAFE agreement, including all important terms, such as the rights of the investor, the conditions of conversion, and the obligations of the parties. The lawyer services online adapts the standard SAFE template to the specific terms of the agreement, taking into account the specifics of the startup and the investor's requirements.
Legal audit services of a lawyer: The lawyer checks the legal status of the company, its corporate documents, intellectual property rights and other aspects that may affect the deal. The lawyer assesses the legal risks associated with the SAFE terms and provides recommendations on how to minimize them.
Drafting and signing: The lawyer checks all documents before signing to ensure their compliance with the requirements of the law and the agreed terms of the agreement. A lawyer helps to ensure that the contract is properly signed, including checking the identity of the signatories and complying with the formalities.
SAFE is a flexible tool, and its terms can vary depending on the specific needs of the startup and the investor. The main challenge is to reach a mutually beneficial agreement that meets their expectations and strategic goals. A lawyer advice is critical to ensure the legality and correctness of the agreement, protect the interests of the parties and prevent potential problems in the future.
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