Now that we are (hopefully) seeing the beginning of the end for the coronavirus pandemic, many founders are turning their attention back to the crucial fundraising goals they set at the beginning of 2020. For those that want an “easy button” to startup fundraising, the Simple Agreement for Future Equity (“SAFE”) may be the answer.
The SAFE agreement offers an alternative to convertible debt and has been widely adopted by the investor community. The well-known incubator, Y Combinator, developed the SAFE agreement in 2013 as a way to provide seed funding for startups and hosts SAFE financing documents on its website here. Although when first introduced SAFEs were used to raise smaller amounts of money as a “bridge” to a later priced round of financing, the new SAFEs are often used for much larger seed rounds and considered wholly separate financings. As a result, the new SAFEs offer founders and investors the ability to calculate immediately how much of the company has been sold, rather than waiting for the future priced round. Additionally, the new SAFEs allow startups to close with any individual investor as soon as the founders and investor are ready to sign, and the investor is ready to provide the funds; there is no need to coordinate a single close with all investors on board.
In terms of negotiation, one of the key benefits of the SAFE agreement is that there are fewer terms to negotiate for a SAFE agreement than for convertible debt financings (where the debt converts to equity at a later round of financing). Those terms include the valuation cap, the discount rate, whether the holder of the SAFE will receive “most favored nation status,” and the pro rata right. For a discussion of these terms, review the SAFE user guide on the Y combinator site here.
Unlike convertible debt, there is no need to negotiate the interest rate or maturity date and there is no ability for the investor to “call” the SAFE instrument and force repayment. Instead, the entire premise of the SAFE is that it be a straightforward, one document round of financing without numerous terms to negotiate and without recourse if the venture fails. Therefore, attorneys' fees, time and hassle will be saved and risk for the startup will be minimized.
If you have questions about SAFEs or would like an attorney to review the terms you have negotiated before signing, don't hesitate to reach out to us at Res Nova Law at [email protected] or by dialing 503-807-8821.