October 22, 2021

Define Simple Agreement For Future Equity

With participation or enjoyment rights, investors can invest additional funds to maintain their ownership share in equity financing after the financing, for which the SAFE was initially converted into equity. In the exercise of proportional rights, the investor pays the new price of the cycle and not the price he paid at the time of the initial conversion of the SAFE. Among the advantages of SAFEs are execution in a short time and relatively low legal fees due to the very simplicity of the agreement. Potential investors may prefer a SAFE, as in the event of termination, the agreement may contain a clause giving priority to the investor over ordinary shareholders. However, the investor has no guarantee rights over the assets of the company and other creditors may have priority. [2] Some issuers have offered, as part of certain crowdfunding offers, a new type of collateral that they have called SAFE. The acronym stands for Simple Agreement for Future Equity. These securities carry risk and are very different from traditional common shares. As the Securities and Exchange Commission (SEC) states in a new Investor Bulletin, a SAFE offering, whatever its name, cannot be “simple” or “safe.” The exact conditions of a SAFE vary. However, the basic mechanism[1] is that the investor provides specific financing to the company when it is signed.

In return, the investor will subsequently receive shares of the company related to certain contractual liquidity events. The primary trigger is usually the sale of preferred shares by the company, typically as part of a future price increase cycle. Unlike a direct share purchase, shares are not valued at the time of signing the SAFE. Instead, investors and the company negotiate the mechanism by which future shares will be issued and postpone the actual valuation. These conditions typically include an entity valuation cap and/or a discount on the valuation of the shares at the time of the triggering event. In this way, the SAFE investor is insequential in the upward trend of the company between the date of signature of the SAFE (and the financing provided) and the trigger. A SAFE is based on an expected event in the future, as opposed to a strict date (a Canadian SAFE may need a due date to be effective). As soon as this event occurs, the investor`s right to obtain equity is converted into real equity, often preferred shares. A frequent event for transformation is future equity financing, typically led by an institutional venture capital (VC) fund. There are, however, other events that can trigger the transformation, such as for example. B a change of control scenario, an IPO or liquidation.

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About Bob Bergey

Bob has been driving motorcoaches since 2002, in every state east of the Mississippi and a few west, as well as the four southeastern-most provinces of Canada. In addition to driving, he's an avid photographer (and former professional), enjoys writing and technology.