Safe Agreements Explained
2023-04-23
Safe Agreements Explained: What You Need to Know
When it comes to business, one of the most important documents you can have is a safe agreement. A safe agreement is a contract used by startup companies to raise capital from investors. It is a relatively new type of agreement that has gained popularity in recent years.
But what exactly is a safe agreement? And how does it work? In this article, we will explain everything you need to know about safe agreements.
What is a Safe Agreement?
A safe agreement, which stands for Simple Agreement for Future Equity, is a type of contract used by startups to raise funds from investors without giving away actual equity in the company. Instead, investors receive the right to convert their investment into equity in the future, at a predetermined price.
Under a safe agreement, investors provide capital to the startup in exchange for the potential to receive equity at a later date. The amount of equity the investor will receive upon conversion is based on the valuation of the company at the time of the conversion.
How Does it Work?
A safe agreement is a simple document that outlines the terms of the investment. The agreement will include the following information:
– The amount of the investment
– The valuation cap, which is the maximum valuation of the company at the time of conversion
– The discount rate, which is the rate at which the investor will receive equity upon conversion
The investor will invest the agreed-upon amount of funds into the startup, and in exchange, they will receive the right to convert their investment into equity at a future date. The conversion usually happens when the company raises additional capital or has a liquidity event, such as an acquisition or IPO.
If the company has not yet had a liquidity event at the time of conversion, the investor can still receive their investment back with interest. This makes safe agreements a low-risk investment option for investors, as they have the potential for a high return on investment without risking their funds in the early stages of a startup.
Why Use a Safe Agreement?
Safe agreements are becoming an increasingly popular option for startups to raise capital. They offer several advantages over traditional equity financing, including:
– Simplicity: Safe agreements are a much simpler document than the complex stock purchase agreements used in traditional equity financing.
– Lower legal fees: Because safe agreements are simpler, they often require lower legal fees than traditional equity financing.
– Lower dilution: Safe agreements allow startups to raise capital without diluting the equity of their current shareholders. This can be particularly beneficial for startups that are already established and have a significant amount of equity already issued.
– Investor protection: Safe agreements provide investors with protection in the event that the startup fails to raise further capital or have a liquidity event. In these cases, the investor can still receive their investment back with interest.
Conclusion
Safe agreements are a simple and effective way for startups to raise capital from investors without giving away actual equity in the company. They offer several advantages over traditional equity financing, including simplicity, lower legal fees, and lower dilution. If you are considering using a safe agreement to raise capital for your startup, it is important to consult with a legal professional to ensure that you fully understand all of the terms and conditions of the agreement.