One of the easiest (and cheapest) ways to invest in a start-up business is often a simple agreement for future equity (SAFE). SAFERs are easy to use and do the job with minimal cost and can work for both individual investors and investor groups. Mohsen Parsa, a startup lawyer in Los Angeles, helps clients understand SAFE agreements, draft comprehensive SAFE agreements for clients, and provide general advice and guidance on these types of agreements so that early-stage clients can make the best decisions in the short and long term. Here`s an overview of SAFE deals and why they`re important to startups, but if you have specific questions about your SAFE deals or how to close these types of deals, contact Parsa Law, Inc. today. In the past, startups used bonds that were convertible with investors. A convertible bond is a hybrid bond between debt and equity that acts as debt until a certain point in the future, when it can be converted into shares as soon as a certain event occurs. The start-up (or another company) and the investor enter into an agreement. They trade things like: A seed-stage investor takes a high risk from the start. This risk is not rewarded if all the investor gets is the right to invest with others later when the company has more value. A valuation cap solves this problem for the investor.
A valuation cap sets a maximum enterprise value to determine the percentage of equity the investor receives. Without a valuation cap, the SAFE investor`s percentage of equity continues to decline as enterprise value increases. As a startup, you undoubtedly go through deals after deals with other companies, suppliers, contractors, investors and many others. A lesser-known agreement is the Simple Agreement for Future Equity (SAFE). These agreements can be important for a startup`s success, but not all SAFE agreements are created equal. Y-Combinator saw the potential to solve both of these problems by introducing SAFE, which was designed to be easy to understand and faster to generate than convertible bonds, usually at a lower cost. If the start-up fails, the money remaining after paying other liabilities will be returned to the debt holders, who will be preferred to shareholders. SAFERs are simple and useful. But SAFERs also have terms that can be complicated.
Whether you are making or receiving the investment, your lawyer can help you obtain these terms to maximize the benefits of SAFE for you. In today`s email, I would like to introduce you to the “Simple Agreement for Future Justice” (SAFE). Thus, a SAFE investor could choose to invest $50,000 with a valuation cap of $1 million to get five percent of the company. If the value has increased to $5 million at the time of the triggering event, the SAFE investor would only receive one percent if there is no valuation cap. The numbers are subject to some nuances regarding the amount of future equity investment to explore in a future blog post. The investment is declared as a debt in the company`s finances. Authorized capital and paid-up capital only increase with the conversion of bonds into shares. However, there is another concept called link. It`s like SAFE agreements, but some terms differ and are recognized by Indian law. The SAFE structure allows emerging companies to obtain much-needed financing without the risk of reaching a maturity date before closing an equity financing. And because a SAFE is not a loan, there is no interest.
Another advantage for startups is that since SAFERs are not debts, they are not reflected in the company`s balance sheet. SAFE are contractual rights to acquire the Company`s equity at a later date, similar to warrants, but the conversion price remains indeterminate until a later date upon execution and conclusion of an iSAFE agreement with the investor on the terms requested by mutual agreement between the Company/promoters and the investors. A discount rate gives the SAFE investor a discount on what future investors pay for equity at the time of the triggering event. This is a discount on the future selling price. A discount rate of 85% means that the SAFE investor receives their future equity for 85% of what future investors pay, which rewards them for early investment. An “idea” for a business needs money to experiment with whether the idea has the likelihood of becoming a profitable business in the future. SAFE agreements have a lot to offer. But what benefits the startup, such as the lack of standardization, can also hurt the startup if the deal is not designed and negotiated professionally and strategically.
If you`re a start-up looking for alternative and creative ways to find investors, contact Mohsen Parsa today. By completing an SLA, you invest a certain amount of money and receive shares in the future as long as the triggering event occurs. This option gives your business immediate financing so it can be up and running without having to determine the price of a stock, making it easier for it to get started. .