What Is A Safe Simple Agreement For Future Equity

Y Combinator, a well-known technology accelerator, created the SAFE rating in 2013 (simple agreement on future capital) and uses it to finance most start-ups participating in three-month development meetings. Since 2005, Y Combinator has funded more than 1,000 startups, including Dropbox, Reddit, WePay, Airbnb and Instacart. In addition to the negative reasons why a SAFE investor should never receive equity in the company (such as the company that goes bankrupt before obtaining qualified financing), if the company is doing extremely well and never has to make financing that meets the conversion threshold, a SAFE investor can never obtain equity in the best performing start-ups. , able to self-finance. With participation rights or participation rights, investors can invest additional funds to maintain their ownership during equity financing after the financing that initially converted SAFE into equity. If the investor exercises pro-rata rights, he pays the new price of the round and not the price he paid during the first safe transformation. At Dorm Room Fund, we invest with unlimited SAFEs at no discounts, but with an MFN clause. This means that when converted into equity, founders end up having more of the business than if there was a cap or discount. If new investors buy shares for $1.00, it`s also Dorm Room Fund. SAFS are instruments that function as an arrest warrant. In return for capital, the SAFEs recall the agreement reached with the investor that, after a subsequent cycle of equity financing, after a change of control over the company or the IPO of a company, the amount of the SAFE investment will be converted into equity.

Although the function is similar, FAS differs from convertible bonds in that the amount invested under a SAFE is not a debt incurred or requires a monthly payment, and has no maturity date. SAFCes are not direct stakes in the company, but a promise that the amount of the investment will be converted into equity in the future. This aspect of FAS puts investors at a fundamental concern. Investors are not protected under public corporate or federal securities law, as would be the case with the issuance of equity, nor can they seek redress without fraud or other contractual remedies if SAFE is not converted.

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