SAFE (Simple Agreement for Future Equity)

Under the technological era, the start-up ecosystem has emerged as advancements in technology have made it easier for individuals to pursue their dreams. To all startups, early-stage funding is critical, and a simple agreement for future equity (SAFE) has started to gain popularity, being a short and flexible agreement providing future equity rights.

In SAFEs, startups may receive funding from investors without determining a valuation or issuing equity immediately. Their investments will be converted into equity once a predefined triggering event occurs (such as an equity financing round or liquidity event). SAFEs are different from traditional financing methods such that they do not accrue interest or have a maturity date.

For startups, SAFEs can avoid the significant equity dilution for founders, allowing them to keep more control over the company. Also, since SAFE is not a debt instrument and does not accrue interest, it avoids the pressure of accumulating debt and making repayments. As for investors, the major attraction of a SAFE is the potential for high returns, since their equity could appreciate substantially once the startup succeeds.

SAFEs are certainly different from convertible notes, which are traditional financial instruments issued first as debt and can then be converted to equity under the specific terms of the note agreement. SAFEs are more like a warrant.

 

How to use this document?

To use the 'SAFE (Simple Agreement for Future Equity)' document, follow these steps:

1. Review the document: Familiarize yourself with the contents of the document, including the terms and conditions outlined.

2. Enter relevant information: Fill in the necessary information, such as the names and addresses of the parties involved, the purchase amount, and the valuation cap.

3. Understand the events: Gain a clear understanding of the different events described in the document, including equity financing, liquidity events, and dissolution events.

4. Execute transaction documents: If an equity financing occurs, the investor must execute and deliver transaction documents related to the financing. Ensure that these documents are consistent with those entered into by other purchasers of standard ordinary shares.

5. Consider pro rata rights: If applicable, the investor and the company will execute a pro rata rights agreement. Understand the implications and rights associated with this agreement.

6. Prepare for liquidity events: If a liquidity event occurs, the investor has the option to receive a cash payment or shares of ordinary shares. Consider the pros and cons of each option and make an informed decision.

7. Understand dissolution events: In the event of a dissolution, the company will pay the investor an amount equal to the purchase amount. Be aware of the priority of this payment and any limitations on the company's available assets.

8. Monitor expiration and termination: The agreement will expire and terminate upon the issuance of stock to the investor or the payment of amounts due. Keep track of these events and ensure compliance with the agreement.

9. Seek legal advice if needed: If you have any questions or concerns about the document or its implications, consult with a legal professional for guidance.

Please note that this guidance is for informational purposes only and does not constitute legal advice. It is recommended to consult with a qualified attorney for specific legal guidance related to the 'SAFE (Simple Agreement for Future Equity)' document.