SAFE bonds (Simple Agreement for Future Equity) are a simpler alternative to convertible bonds. Launched in 2013 by Y Combinator, a Silicon Valley accelerator, they allow startups to structure Seed investments without rates or maturity dates. SAF These are brief five-page documents. Valuation limits are the only negotiable detail. A VC funding cycle can be a tedious and expensive process for a startup. As a general rule, after a period of due diligence awareness, you need to amend the company`s constitutional documents (its articles of association) and enter into a share purchase agreement and shareholder agreement with your new investors, which can blow valuable time (and resources). „Safe“ notes – what are they and what makes them „safe“? There are some similarities between SAFE bonds and convertible bonds. Both serve as a viable way to help startups overcome their current big obstacle of growth or scale to reach the milestones that warrant a Series A cycle. In addition, both options have a discount on the next round (or the current cycle for convertible bonds), so neither is a clear advantage. In this sense, examining the differences will help an entrepreneur to take into account its advantages and disadvantages in determining its preferred investment conditions.
Many people believe that it is important for investors and founders to meet in the middle for negotiations for greater well-being to cooperate. All tools need to be safe and productive at both ends to allow investors to continue to invest and create developers. Convertible bonds may be preferred over SAFE bonds because they are a well-known commodity. The 10,000 types of converted documents and warrants make them more nuanced and confusing than Orrick, Fenwick, WSGR and other Seed series stock exchange documents. Every company looking for a seed round investment has different needs, so many factors should be taken into account if you make an informed choice for yourself. If you need help making a decision, contact one of UpCounsel`s leading lawyers to review the material with you. The SAFE rating was created to make transactions fast and inexpensive. However, as you can see, there are issues with the SAFE rating.
Although it is a quick agreement, flexibility and future negotiations are lost. It is therefore worth considering its competitor: the convertible loan. If there`s one piece of advice I could give to anyone considering using a convertible or SAFE, it`s this: be realistic when it comes to pre-money and post-money valuations and prepare different modeling scenarios for your capital structure to understand the dilutive effects/returns before starting negotiations. If people don`t understand the mathematics of safe skidding, then a stock market trade might be the best for them. A pre-money evaluation can also be considered a better choice. Ask yourself: should I get equity with full ratchet anti-dilution or with large-scale weighted average anti-dilution? If you think you`re a broad weighted average, do a price tour, not a rating. If you venture for a capped rating, you should do it in equity instead. Convertible bonds and SAFE bonds are convertible bonds, which means that they can ultimately be converted into equity. Below are some terms and conditions and thoughts to follow. In addition, convertible bonds are generally only triggered when a „qualifying transaction“ takes place (more than a minimum amount set by the agreement) or if both parties agree to the conversion. The SAFE can convert if you can find any investment amount in equity….