Historically, most start-ups have been financed either by equity or by loans in the form of convertible debt securities. However, a number of hybrid instruments have recently been created to finance start-ups. Especially, and very popular these days, is the use of an instrument called SAFE. “SAFE” is an acronym for “simple agreement for future capital.” A SAFE is a contract to obtain an amount of equity that will be fixed in a future price cycle for which the investor pays the purchase price in advance. Developed and published by Y Combinator at the end of 2013, SAFE aims to provide a more efficient, clearer and simpler alternative to convertible bonds and, in particular, certain aspects of convertible bonds (including a defined term, interest rate and maturity date). Despite their name, FAS is not always as “simple” as expected, and it is not necessarily “for future capital” if the conversion never takes place. The pros and cons of SAFes for businesses and investors are discussed below. Another new function of the safe concerns a “prorgula” right. The original safe required the company to allow holders of safes to participate in the financing round after the financing round in which the safe was converted (for example. B if the safe is converted into series group preferred actuators, a secure holder – now holder of a Series A preferred share subseries – is allowed to acquire a proportionate portion of the Series B preferred share).
While this concept is consistent with the original concept of safe, it made no sense in a world where safes were becoming independent funding cycles. Thus, the “old” pro-rata right is removed from the new safe, but we have a new model letter (optional) that offers the investor a proportional right in the preferential financing of Series A on the basis of the converted safe property of the investor, which is now much more transparent. Whether a start-up and an investor enter the letter with a safe will now be a choice that the parties will choose, and this may depend on a large number of factors. Factors to consider can (among other things) the amount of the safe purchase and the amount of future dilution that proportional duty can cause to the founders – an amount that can now be predicted with much greater accuracy if post-money safes are used. The exact conditions of a SAFE vary. However, the basic mechanics are that the investor makes available to the company a certain amount of financing at the time of signing. In return, the investor will later receive shares in the company in connection with specific contractual liquidity events. The main trigger is usually the sale of preferred shares by the company, usually as part of a future fundraising cycle. Unlike direct equity acquisition, shares are not valued at the time of SAFE signing. Instead, investors and the company negotiate the mechanism with which future shares will be issued and defer actual valuation. These conditions generally include an entity valuation cap and/or a discount on the valuation of the shares at the time of triggering.
In this way, the SAFE investor participates above the company between the signing of safe (and the financing provided) and the triggering event. 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.