This solves the liquidation overhang problem, but adds some complexity to the transaction. This series “A-2” stock would be the same as normal Series A stock, except for a lower liquidation preference. You can negotiate for the SAFEs to convert into a separate “sub-series” of Series A. This is a scenario where a SAFE or Note investor ends up with much more liquidity preference in their Series A stock than they actually paid for. A valuation cap can lead to a Liquidation Overhang problem. The rest of the SAFE document defines the mechanics of how and when the SAFE investor receives her Series A shares. They are the terms you would normally negotiate with an investor. The Discount Rate and the Valuation Cap are the main moving parts to a SAFE. A higher number is better for the company (generally). It’s defined in terms of the company’s market cap rather than share price. The Valuation Cap is an upper limit on the price per share a SAFE investor will pay for Series A stock. The Discount Rate - the term actually used in the SAFE - is like a Nordstrom coupon that says “pay 80% of the retail price” instead of “get 20% off the retail price.” A 20% discount is the same as an 80% Discount Rate. Note that the SAFE defines a “Discount Rate”, not a discount. If Series A investors pay $1.00 per share, then the SAFE investors buy their shares at $0.80. A 20% discount is the same as a 20% off coupon at Nordstrom. The discount rate is like a coupon you might use at a store. The Valuation Cap and Discount Rate are dials you can turn to control how much lower that price will be.ĭiscount Rate. Since SAFE investors are investing earlier and taking more risk than Series A investors, the SAFE investors will pay for their shares at a lower price than the Series A investors. The “ Discount Rate” is %.Ī SAFE grants the right to receive a certain number of shares in a Series A financing. THIS CERTIFIES THAT in exchange for the payment by (the “Investor”) of $ (the “Purchase Amount”) on or about, , a corporation (the “Company”), hereby issues to the Investor the right to certain shares of the Company’s capital stock, subject to the terms set forth below. This first paragraph states who is investing and how much, and is followed by the Valuation Cap and Discount Rate. It can’t be re-sold except under very specific circumstances. It essentially says: this SAFE is an illiquid, private company investment. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THIS INSTRUMENT AND ANY SECURITIES ISSUABLE PURSUANT HERETO HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. Events: Series A, Acquisition, Bankruptcy SAFEs are already founder-friendly documents, but I’ll offer a few tips on negotiating SAFEs to that can make life a little easier for founders. I have some thoughts on the Post-Money Safe here.Īll blockquotes in this post are taken directly from the standard Form SAFE document. The terms and definitions are still mostly the same, but the math works a bit differently. In 2018, YC released the Post-Money SAFE. Note: I wrote this in 2017, and so it only addresses the Pre-Money Safe. Specifically, I’ll be running through the Safe: Cap and Discount version. You can grab a copy of the SAFE document here. Since that can be tiresome, I’ll run through the SAFE line-by-line and do the jumping for you. To read and understand the SAFE template you need to jump back and forth between the “events” section and the “definitions” section. Unlike a convertible note, a SAFE is not debt, and so it has no deadline for repayment and no interest rate.Īlthough they’re “simple”, there’s still a learning curve. A SAFE is a promise to issue a certain number of shares in the future - “Simple Agreement for Future Equity”. SAFE Financings Explained Line by Line Sep 5, 2017Ī SAFE is a relatively simple document that startups commonly use to raise seed capital.
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