Safe Agreement Equity

The SAFE is a kind of warrant that gives investors the right to obtain shares of the company, usually preferred shares, if and if there is an upcoming valuation event (i.e. the next time the company increases, acquires « valued » equity or submits an IPO). The exact conditions of a SAFE vary. However, the basic mechanism[1] is that the investor provides specific financing to the company when it is signed. In return, the investor will subsequently receive shares of the company related to certain contractual liquidity events. The primary trigger is usually the sale of preferred shares by the company, typically as part of a future price increase cycle. Unlike a direct share purchase, shares are not valued at the time of signing the SAFE. Instead, investors and the company negotiate the mechanism by which future shares will be issued and postpone the actual valuation. These conditions typically include an entity valuation cap and/or a discount on the valuation of the shares at the time of the triggering event. In this way, the SAFE investor is insequential in the upward trend of the company between the date of signature of the SAFE (and the financing provided) and the trigger. Our first vault was a « pre-money » vault, because at the time of its launch, startups raised small amounts of money before launching a cheap funding round (typically a round of Serie A preferred shares). The safe was an easy and quick way to get the first money in the business, and the concept was that safe owners were just early investors in this future price cycle.

But fundraising at the beginning developed in the years following the launch of the original vault, and now startups are raising much larger sums of money than the first round of « Seed » funding. While safes are used for these seed towers, these cycles are really better regarded as totally separate financing rather than « bridges » in subsequent price cycles. Another innovation of the safe concerns a « proportional » right. The initial vault required the company to allow safe holders to participate in the funding cycle after the funding cycle into which the vault was transformed (for example. B if the safe were converted into Series A preferred share financing, a safe holder – now holding a sub-series of Series A Preferred Shares – would be allowed to acquire a proportionate share of the Series B Preferred Shares). While this concept fits the original vault concept, it made less sense in a world where vaults have become independent funding cycles. Thus, the « old » proportional right is removed from the new safe, but we have a new model letter (optional) that offers the investor a proportional right in the financing of the Series A Preferred Stock, based on the investor`s as-converted secure ownership, which is now much more transparent…

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