Another term that can come with a SAFE is called the rating cap. This is another way for the SAFE investor to get a better price per share than a later investor. If your business ends up finding money for an valuation above the „cap,“ then the SAFE investor can convert it into a share price corresponding to the ceiling. Downstairs, I modeled what a $5 million valuation cap would be. In this case, the SAFE investor gets shares at $0.63, instead of receiving shares for $1.00. SAFE is a kind of warrant that gives investors the right to obtain shares of the company, usually preferred shares if and when there is a future valuation event (i.e. when the company collects „cheap“ equity next year, is acquired or it files an IPO). Y Combinator, a well-known technology accelerator, created the SAFE rating in 2013 (simple agreement on future capital) and uses it to finance most start-ups participating in three-month development meetings. Since 2005, Y Combinator has funded more than 1,000 startups, including Dropbox, Reddit, WePay, Airbnb and Instacart. A „SAFE“ is an agreement between an investor and an entity that grants the investor rights to the company`s future equity, which are similar to a share warrant, unless a certain price per share is set at the time of the initial investment. The SAFE investor receives future shares in the event of an investment price cycle or liquidity event. SAFEs are supposed to offer start-ups a simpler mechanism to apply for upfront financing than convertible bonds. If you have questions about simple future investment agreements or other equity financing issues, lawyers from Parker McCay`s Corporate and Commercial Lending Departments will be available.
As soon as the terms are agreed and the SAFE is signed by both parties, the investor sends the agreed funds to the company. The entity uses the funds in accordance with the applicable conditions. The investor receives equity (SAFE preferred shares) only when an event mentioned in the SAFE agreement triggers the conversion. With participation rights or participation rights, investors can invest additional funds to maintain their ownership during equity financing after the financing that initially converted SAFE into equity. If the investor exercises pro-rata rights, he pays the new price of the round and not the price he paid during the first safe transformation. 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.