A SAFE is based on an event planned in the future as opposed to a strict date (a Canadian SAFE may still need a due date to take effect). Once this event occurs, the investor`s right to receive equity is converted into real shares, often preferred shares. A common event for conversion is future equity financing, which is typically led by an institutional venture capital (VC) fund. However, other events can trigger the conversion, such as. B, a change of control scenario, an IPO or liquidation. “We have observed that many founders do not do the basic dilution calculation associated with what happens to their capitalization table (especially their personally owned shares) when these notes are actually converted into shares. By often launching the valuation several times, entrepreneurs end up holding less equity in their business than they thought. And if a turn of shares is inevitably taken into account, entrepreneurs do not like the founder`s dilution figures at all. In the event of an equity financing event before the maturity or end of the SAFE, the entity automatically issues to the investor: SAFEs are not a debt instrument. Instead, they are defined as an arrest warrant. This means that they do not bear interest rates.
However, convertible bonds can have an interest rate of 2% to 8% (most fall by 5%). In the meantime, a SAFE that is not up to par is treated like any other convertible security (e.g.B. warrants or options). When creating future plans, keep in mind that there is no manual to scale your business, but there are anecdotal stories and wisdom that can help you understand and weigh your options at every crossroads (and remind you to stop and find joy in them). The Startup Founder`s Guide to Fundraising is a compilation of real-life fundraising stories, startup founders, and investor reporting requirements and expectations at every step. Unlike a convertible bond, a SAFE is not a loan; it is more like an arrest warrant. In particular, there is no interest paid and no due date, and therefore SAFERs are not subject to the regulations that debt may have in many jurisdictions. This simplicity is the main motivation for a SAFE. “Vaults should work like convertible bonds, but with fewer complications,” says startup accelerator Y Combinator.
If you have any questions about simple agreements for future actions or other equity financing matters, lawyers from Parker McCay`s corporate and corporate lending departments are at your disposal. There are some similarities between SAFE bonds and convertible bonds. Both serve as a viable way to help startups overcome their current big obstacle to growth or scaling to reach the milestones that warrant a Series A cycle. .