Simple Agreement For Future Equity Bilanzierung

by Jill & Cathy on April 12, 2021

A SAFE is a useful tool for start-ups that want to raise capital without incurring higher costs and lengthy negotiations related to more traditional financing methods. Nevertheless, it is important that the founders carefully rebalance the amount of equity they wish to give up and, for investors, that they do not have shareholder rights and that they do not have recourse in the event of a conversion to equity. A “SAFE” is an agreement between an investor and an entity that grants the investor rights to the company`s future equity, which are similar to a share warrant, unless a certain price per share is set at the time of the initial investment. The SAFE investor receives future shares in the event of an investment price cycle or liquidity event. SAFEs are supposed to offer start-ups a simpler mechanism to apply for upfront financing than convertible bonds. As soon as the terms are agreed and the SAFE is signed by both parties, the investor sends the agreed funds to the company. The entity uses the funds in accordance with the applicable conditions. The investor receives equity (SAFE preferred shares) only when an event mentioned in the SAFE agreement triggers the conversion. 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. Despite the positive, there are some drawbacks that founders should be aware of. Often, creators will introduce an valuation ceiling into a SAFE and find funds until they dilute their share of participation on the basis of that assessment. It is important to remember that the valuation cap is not necessarily the valuation of increasing capital. To illustrate this, we assume that a founder raised $500,000 in seed capital through a SAFE. The SAFE conversion event is a $1 million share round (commonly known as A-round), and equity is converted either with a valuation ceiling of $10 million or with a 20% discount. If, due to a liquidity crisis or other market factors, the company is forced to raise $1 million for a valuation of $6 million, the founders will have abandoned 27% of their business compared to the 16% they would have expected for a valuation of $10 million. The simplicity of the investment nature and standard presentation document allow investors to make decisions quickly, while reducing the pressure to meet deadlines to participate in a series of formal actions. If you`re involved in start-ups, you`ve probably heard the term “safe.” Y Combinator launched a simple agreement for future equity, better known as SAFE, in 2013 as an inexpensive, simple and fast way for start-ups to raise capital.

While FASAs have not become as popular in Canada as they are south of the border, they are developing as an alternative to more traditional forms of early financing, such as convertible bonds or preferred shares.

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