Y Combinator Simple Agreement for Future Equity

The two fundamental questions are how many shares the investor receives and when he receives them. The SAFE agreement was first developed by Y Combinator in 2013 and consists of a startup and an investor. In exchange for early capital, the startup promises to convert the funds into future stocks or company shares when the startup starts raising funds for price rounds. Startups often use SAFE agreements because it is difficult to evaluate their business in the early days. The exact conditions of a SAFE vary. However, the basic mechanism[1] is that the investor provides the company with a certain amount of financing at the time of signing. In return, the investor will receive shares of the company at a later date, as part of certain contractually agreed liquidity events. The main trigger is usually the sale of preferred shares by the company, usually as part of a future price action cycle. Unlike a direct purchase of equity, shares are not valued at the time of signing the SAFE. Instead, investors and the company negotiate the mechanism by which future shares are issued and postpone the actual valuation. These conditions typically include a valuation cap for the company and/or a discount on the valuation of the stock at the time of the triggering event. In this way, the SAFE investor participates in the upward trend of the company between the time of signing the SAFE (and the financing provided) and the triggering event. With the SAFE post-money agreement, the investor and the company agree on a post-money valuation cap.

Post-monetary valuation simply means the sum of the pre-monetary valuation plus any newly raised funds or assets. Investors like this deal because they can tie up the percentage of the business they will own when the triggering event occurs. Post-Money-SAFE is clear, simple and more investor-friendly. This agreement does not dilute the investor`s share. Kirsty: Well, in this example. So the question is why they have different post-monetary valuation ceilings. And in this example, you know, it could be for a number of reasons, but in this example, we`re going to assume that it happened maybe a month after the startup and maybe six months after the startup and more in the business and so there`s a little less risk, so the company was able to negotiate a different cap. But things change across the company and it`s perfectly fine to have different ceilings because, as you can see here, you calculate everything separately and then add it up. All right.

So one company raised $1 million. The first thing it will probably have to do with this money is to hire people. And if you hire employees, you`re likely to give them some fairness. So, in this example, at this point, the company creates an option pool, also known as an AESOP or employee incentive plan. There are many different names for this. And in this example, they created a plan or pool that contains 750,000 shares, and they issued out of their 650,000 shares to the first employees. This has now changed their capitalization chart because they have issued shares. And the fact that more shares are being issued means that the capitalization table is changing because we now have more shareholders. And so now we have a total of 10 million shares that. Completely diluted in this case essentially means the combination of issued and deferred commissions in the option pool. So now we have our founders, instead of owning 100%, 92.5% of the company.

And the option plan represents a total of 7.5% of the company. But remember these SAFE. So these founders don`t really have 92.5% because they also sold 15% of the company. And so they actually own less than the 92.5%. They actually own 85%, or about 78.6%. So, again, this is where it becomes dangerous for the founders. When they forget about SAFE, the founders sit there and say, “Well, I own 92.5%. That`s great. I still own a lot of parts of the company. And they have forgotten about SAFE And the dilution they will get out of them. So it`s very important to keep track of how much you sold on your SAFE so you can do that calculation and say, “Actually, I don`t have a 92.5%.

I have 85% because I sold 15% of the company. But it is also true that these figures have been watered down by these SAFE. As you will see in a moment, these numbers are also changing. The SAFE Agreement has been translated into several languages and applied in many jurisdictions. Startups in India have a version of the SAFE agreement. There is also a Spanish-translated version that Chilean and Spanish-speaking startups use. 1. Automatic conversion to the sale of shares, no threshold of amount a. If the pre-currency > Secure Valuation Cap, the conversion takes place at Value Cap b. If pre-money 2. In liquidation, the conversion takes place at the valuation limit, the fair value of the common shares at the time of liquidation or the return on the money invested. Another innovation of the safe concerns a “proportionate” right. The initial vault required the Company to allow security holders to participate in the financing round following the funding round in which the vault was converted (p.B.

if the vault were converted into Series A preferred share financing, a security holder – now holding a subseries of Series A preferred shares – would be allowed to purchase a proportionate portion of the Series B preferred shares). While this concept was consistent with the original vault concept, it made less sense in a world where vaults were becoming independent funding cycles. Thus, the “old” pro-rata right is removed from the new vault, but we have a new example of a page letter (optional) that offers the investor a pro-rated right in Series A preferred share financing, based on the investor`s converted safe ownership, which is now much more transparent. Whether or not a startup and an investor enter the collateral letter with a safe will now be a decision that the parties will make, and it may depend on various factors. Factors to consider may include (among others) the purchase amount of the safe and the amount of future dilution that the pro-rata right will entail for the founders – an amount that can now be predicted with much more accuracy when using post-money safes. Moderator: I`d like to introduce you to Kirsty, who will talk in detail about SAFE, Equity Notes and more. Kirsty. SAFE agreements have a lot to offer.

But what benefits the startup, such as the lack of standardization, can also hurt the startup if the deal is not developed and negotiated professionally and strategically. If you`re a start-up looking for alternative and creative ways to find investors, contact Mohsen Parsa today. GUEST: Matias Vukusic is a Chilean startup lawyer who handles many SAFE deals in the venture capital industry. He can be reached on Twitter, LinkedIn or his website vukusic.cl. All right. So those are the three sections that I`m going to talk about. First of all, I`m going to talk about SAFE And in particular American companies. Most companies will first raise funds for SAFE or other convertible bonds, which I will also talk about briefly. .