A SAFE offers an individual the right to acquire equity at a later date If the start-up sells stock in a potential financing. Top Silicon Valley start-ups have traditionally used it to raise funds from certified angel investors. Just invest in a SAFE if you think the start-up will be able to collect funds from skilled investors in the future.
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- March 2, 2021
- Comments: 0
- Posted by: Outpost
What is SAFE ?
Why SAFE ?
SAFEs are used by early-stage startups to avoid the complex process of deciding how much a company is worth. It’s also a lot less costly and easy to grasp than a priced equity round, which can take months to arrange and contain up to 30 pages of legalese that costs tens of thousands of dollars.
When experienced investors – usually venture capitalists – set the price for preferred stock, the amount of shares you earn is decided at the next priced funding. Since you spent earlier, the SAFE always turns into shares at a cheaper price than the venture capitalists charged, thanks to the Valuation Limit and often the Discount Rate.
The most significant concept in this defense is the Valuation Limit. It establishes a target price for the stock; the lower the price, the more shares you will get. If you invest in a company with an $8 million investment limit and they later collect $20 million in a pre-money valuation, the amount of stock you’ll get is based on the $8 million figure. However, if the business is priced at $4 million by the next buyers, that would be your price (perhaps further discounted by the Discount Rate).
A Secured, unlike a Convertible Bond, is not a loan. As a result, it bears no debt, has no maturity date, and has no legal requirement to be repaid. This makes it an easier and less costly way to fund a startup, and it generally further aligns with the wishes of most early-stage venture investors, who never wanted to be lenders (despite being a debt instrument, convertible notes are seldom, if ever, paid back in cash – the startup actually goes bankrupt). The SAFE can have the following variants:
A SAFE with valuation Cap, no discount
A SAFE with discount but no valuation cap
A SAFE with valuation cap, and discount
A SAFE with Most Favoured Nation clause
