A recurring challenge in start-up financing is how to value the venture. Sometimes, the solution is a convertible note that will convert to equity upon the closing of a future equity investment. However, structuring the investment as a note means that the company must repay the debt even if future funding is not obtained.

A recently developed solution to this problem is for the investment to be by SAFE, which is a Simple Agreement for Future Equity. Under a SAFE, the investor provides funding to the company, and the company agrees to issue equity to the investor automatically upon the closing of an equity capital raise without any promise to repay the note if such capital raise never occurs.

A SAFE is similar in some ways to a convertible note, but with two important differences: no maturity date and no interest. This is more in line with economic reality. Most likely, a start-up will only be able to repay a note when there is a funding event, a date that is quite likely to be very different from the note’s stated maturity (assuming such funding date occurs at all). In addition, the investor is investing in hopes of a home run, not a single consisting of a few percentage points of interest.

A major advantage of SAFE’s is that they are truly simple. The SAFE form is six pages, and no other documents are required. Typically, only a few subjects are negotiated, such as whether there will be a valuation cap and a discount (and if so, the amounts of each), and whether the investor is to receive most-favored nation status with subsequent investors. The simplicity benefits both the company and the investor, since the amount of time involved and the transaction costs are significantly reduced.

Despite their streamlined process, SAFE’s will differ from company to company and will not be appropriate for every situation. Moreover, securities laws still apply and parties may wish to include provisions on transfers, board seats or information rights, so the assistance of professional advisors is still highly recommended.

Click here to download the Corporate Law Update: June 2015

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If you would like additional information, please contact any of the following FisherBroyles partners:

Atlanta: Carl Johnston

Chicago: Marty Robins

Los Angeles: Steven Papkin

Boston: Peter Cahill


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