How can you structure a SAFE agreement for seed funding?

Be sure to research the difference between a pre-money valuation vs a post money valuation when evaluating caps. A post-money SAFE sets a fixed ownership percentage for the investor, but a pre-money SAFE does not. As a result, the decision to use a pre-money or post-money SAFE can have a real impact on your equity ownership percentage and share dilution over time.

For an entrepreneur, the best way to structure a SAFE is a discount to the next round value because you don’t know what that value will be. Discounts typically range between 5-20% depending on the situation. On the other hand, investors will likely want the opposite - a valuation cap. They’re making a bet the ultimate round value will be much higher than the valuation cap. If this happens, it could be the equivalent of a 50%+ discount. With a discount to the next round (vs valuation cap), you know exactly what discount you’re giving up.

SAFEs are a double-edged sword. While they provide an accessible and simple form of investment, they can get quickly out of hand with multiple investors, potentially creating confusion on how much dilution there is for the founders. Recommendation: map out different scenarios - including downturns and unexpected growth. Does the SAFE still look good for you in certain situations?

A SAFE (Simple Agreement for Future Equity) is an investment contract where an investor provides funding to a startup in exchange for the right to receive equity later. It's advantageous because it's simple, flexible (no immediate valuation), and investor-friendly (with terms like valuation caps). SAFEs align interests and streamline the fundraising process, making them attractive for early-stage financing. Its a great way for investors to come in while the valuation is still fuzzy with unproven EBITA and Rev multiples.

The valuation cap in a SAFE (Simple Agreement for Future Equity) agreement plays a crucial role in determining the price at which the SAFE investment converts into equity when a future financing round occurs. Here's how the valuation cap impacts the conversion of the investment into equity: 1. Setting a Maximum Valuation; 2. Benefiting Early Investors; 3. Conversion Calculation; 4.Protecting Investor Interests In summary, the valuation cap in a SAFE agreement serves as a safeguard for early investors, ensuring that they have the opportunity to convert their investment into equity at a predetermined maximum valuation and receive a favorable return on their investment relative to future investors.

Safe is just a method used for delaying valuation and give a favorable discount rate at Series A fundraising. Valuation in early stage where a lot of failure risk is involved is rather difficult. In healthcare companies one can look into IP, team, early market traction and similar technologies to base a Valuation cap for Safe. It is a good method to attract angels and early stage investors but needs more practice and adoption. Some countries in Europe provide tax benefits to early stage investors and angels, we need the message to be conveyed clearly to the investor community to increase attractiveness of Safe.

A valuation cap in a SAFE agreement for seed funding sets a maximum valuation for your company, safeguarding investors from excessive dilution as your company grows. Imagine raising $100,000 with a $5 million cap, and later securing a Series A at $20 million. The investor's equity is based on the $5 million valuation, ensuring they receive more shares for their investment. A lower cap benefits investors, while a higher cap favors founders. This strategic mechanism balances risk and reward, fostering a mutually beneficial relationship between investors and founders.

Valuation cap sets the maximum valuation at which the investor can convert their investment into equity in the company during a future financing round. The valuation cap protects the investor by ensuring that they receive equity at a favorable price relative to the company's future valuation, thus incentivizing them to invest early. Additionally, the valuation cap provides clarity and transparency for both parties, helping to facilitate the seed funding process smoothly.

Amount: Indicate the sum of the investment. Value Cap: Establish the highest possible firm valuation before turning an investment into shares. Discount Rate: Establish the investor's share price discount in upcoming rounds. Trigger Events: Describe the occurrences, such as a financing round or sale, that turn the SAFE into equity. Changes and Provisions: Describe how this agreement can be changed. Make sure the agreement complies with all applicable laws and regulations. Signatures: To officially make it official, obtain signatures from both sides.

When startups seek seed funding, they often encounter a term that holds significant weight in their negotiations: valuation cap. The valuation cap, an essential concept in early-stage investments, determines the financial dynamics between startups and investors. Valuation caps are a fundamental aspect of seed funding that startups and investors must understand. Valuation caps play a crucial role in shaping the dynamics of early-stage financing rounds by providing protection for early investors, aligning incentives, and simplifying negotiations.

Investors typically prefer both a valuation cap and a discount rate. Especially in more volatile capital markets with high cost of capital and public & private markets fluctuating and valuation of companies going down in 2022-23, it gives more optionality to investors. For founders and investors its typically recommended to pick what they want to negotiate and why, and try to find a win-win (gives and gets) as it is a long term relationship and main focus should be on joint value creation.

Macroeconomic factors are crucial here. In economies with higher inflation, offering a reasonable discount rate is quite challenging. If is a high rate, startup's capablity to get that much earning, is questionable. If is is a lower rate, the investor's motivation for entering this deal will diminish.

Hacer el descuento compuesto respecto del tiempo, deja muchos incentivos alineados y facilita la aprobación de inversionistas. Fue un mecanismo que me facilitó los cierres iniciales, sin sacrificios significativos.

The standard discount rate is usually 20%. It would disadvantageous for the investor if the startup drags the next fundraise in order to achieve a higher valuation at the priced round and vice versa, thus combining with a valuation cap would be ideal to protect the investor from excessive increase in "price" upon conversion

The thought process that goes into the discount rate in the context of the market that the negotiation is taking place is more important than the actual number. What are the assumptions? What is the range? How does it work for both the investor and the founder? You don't want either party to feel that the other party got more than what they deserved!

Definition: The discount rate is the percentage that is subtracted from the share price that an investor will pay in a subsequent financing round. Goal: By giving early investors shares at a discount to those of later investors, it compensates them for taking on greater risk. Customary Range: The customary range for the discount rate is typically 10% to 30%. Conversion: In a priced financing round, it applies when a convertible note or SAFE (Simple Agreement for Future Equity) changes into equity. Calculation: By applying the discount to the price per share of the upcoming round, the early investor's costs are lowered.

Advantages: 1. Encourages early investment. 2. Boosts investor returns. 3. Facilitates prompt conversion. Disadvantages: 1. Founder dilution. 2. Risk of investor discontent. 3. Complexity in valuation negotiations. In short, while a discount rate can spur early investment, founders must balance its benefits against the risks of dilution and potential conflicts with future investors.

Investors commonly favor having both a valuation cap and a discount rate, particularly in volatile capital markets with high costs of capital. Given the fluctuation in public and private market valuations during the years 2022-23, this approach offers investors more flexibility. For founders and investors, it's advisable to determine what they wish to negotiate and why, aiming to reach a mutually beneficial agreement. Since it's a long-term relationship, the primary focus should be on creating joint value.

A discount rate refers to the percentage off that an investor receives when transforming their SAFE into company shares. This benefits the investor for the risk undertaken by investing in your start-up at an early stage. The investor stands to gain from a higher discount rate, whereas a lower rate tends to be more advantageous for the business founder.

Assess the level of risk associated with your startup and the stage of development when determining the discount rate for the SAFE agreement. Consider factors such as market conditions, traction, and competition when negotiating the discount rate with investors. Balance the need to incentivize early investors with the potential impact on future funding rounds and dilution for existing shareholders.

Contractual provisions known as the Most Favoured Nation (MFN) clause guarantee that one party would be treated equally with all other parties in comparable agreements. Trade agreements and investment agreements frequently contain it. It ensures that every investor has the same advantages and safeguards under investment agreements. Equal trade benefits, such as low tariffs, are guaranteed for all trading partners having MFN status under trade treaties. The MFN provision forbids discrimination and encourages justice. But, if standards are consistently matched to the lowest available, it can result in a "race to the bottom". MFN clauses can be interpreted and applied in a variety of ways, and they are subject to legal review and negotiation.

Include a Most Favored Nation (MFN) clause in the SAFE agreement to ensure fairness and consistency in future funding rounds. Specify that if the company issues SAFEs to other investors with more favorable terms, existing SAFE holders will automatically receive those same terms. Negotiate the scope and applicability of the MFN clause to balance investor interests with the company's flexibility in securing future funding.

A most favored nation clause allows investors to ensure they receive the best terms available by giving them the option to match any superior terms offered to subsequent investors. This provision helps maintain fairness and incentivizes early investors by ensuring they won't be disadvantaged by investing at an earlier stage or under less favorable conditions.

Include a provision ensuring that if the startup offers more favorable terms to subsequent investors, those terms will also apply to the SAFE holder. This protects the investor from being disadvantaged by future financing rounds with better terms.

In Simple Agreement for Future Equity (SAFE), parties, including the startup and investor, must agree on terms like investment amount, valuation cap, and discount rate if applicable. The agreement outlines when the investment converts into equity, often triggered by a qualified financing round. It's crucial to include provisions for events of default and specify governing law and jurisdiction. Both parties should seek legal review before signing the agreement. Documentation and record-keeping are essential for compliance and future reference. By following these steps, startups and investors can establish a clear framework for their investment relationship, mitigating risks and ensuring alignment of interests in the seed funding process.

Structuring a SAFE agreement for seed funding includes specifying terms, valuation cap, conversion mechanics, and trigger events for equity conversion. Incorporating a Most Favored Nation (MFN) clause ensures fair terms for investors, preventing later rounds from receiving better terms. Legal guidance is crucial. #SeedFunding #Startups #Investment

The most favored nation (MFN) clause in investment agreements ensures that an investor receives the best terms offered to any other investor in subsequent financing rounds. It can be advantageous for investors, providing protection against unfavorable terms, but it may also limit a company's flexibility in negotiating future deals and potentially deter new investors who are unwilling to match existing terms. Overall, its impact depends on the specific context and how it is implemented within the agreement.

The Most Favoured Nation (MFN) clause, found in various contractual provisions, ensures that one party receives treatment equal to that of all other parties in similar agreements. It is commonly found in trade agreements and investment agreements, ensuring that all investors enjoy the same benefits and protections under investment agreements. Trade treaties guarantee equal trade advantages, such as minimal tariffs, to all trading partners holding MFN status. The MFN provision prohibits discrimination and promotes fairness. However, if standards consistently align with the lowest available, it may lead to a "race to the bottom". The interpretation and application of MFN clauses can vary, requiring legal scrutiny and negotiation.

A Most Favored Nation (MFN) clause is a stipulation that allows the investor to adjust their SAFE terms to align with any superior terms offered to other investors in the same or future rounds. This ensures that they don't feel penalized for investing earlier or on less attractive terms. An MFN clause tends to favor the investor, while its absence generally benefits the founder.

Absolutely, a most favored nation (MFN) clause aims to protect investors by ensuring they receive the most favorable terms offered to any subsequent investor in the same or later rounds. This provision allows early investors to align their investment terms with those of later investors, thereby preventing them from feeling disadvantaged by investing earlier or at less favorable terms. While beneficial for investors, including an MFN clause may lead to complexities and potential limitations for founders in negotiating future financing rounds. Omitting the MFN clause provides founders with greater flexibility in structuring deals and negotiating terms that best suit the company's interests.

Pro rata rights can sometimes be a double edged sword. Allowing existing shareholders the right to top-up and maintain their shareholding in theory, is good and a positive signal to incoming investors, but also presents a tough situation if there is high demand from incoming investors to participate in the round. Founders will then need to balance out round allocation to satisfy all parties without excessive dilution

Grant the investor the option to participate in future financing rounds to maintain their ownership percentage. This allows the investor to invest additional capital to prevent dilution of their ownership stake.

Such rights, exemplified by the ability to invest additional funds to preserve ownership percentage, underscore the investor's commitment and belief in the company's potential. While advantageous for investors seeking to avoid dilution, it presents a strategic consideration for founders, who must balance investor interests with the company’s need for flexibility and control. This dynamic highlights the importance of strategic planning and relationship management in fundraising, emphasizing the need to carefully navigate investor rights while fostering a supportive and equitable investment environment.

Grant investors a pro rata right in the SAFE agreement, allowing them the option to participate in future equity financing rounds to maintain their ownership percentage. Define the terms and conditions under which investors can exercise their pro rata rights, including the timing, amount, and process for participation. Consider the impact of pro rata rights on future fundraising efforts and the dilution of existing shareholders when negotiating the terms with investors.

Besides the benefits for the investor, this also helps founders rely on a bench of committed long term investors and keeping them engaged with follow on rounds. It is in general good to have fewer bigger committed investors.

These rights, demonstrated by the capacity to inject more funds to maintain ownership stakes, signify the investor's dedication and confidence in the company's prospects. While beneficial for investors aiming to mitigate dilution, it poses a strategic consideration for founders. They must reconcile investor interests with the company's imperative for adaptability and authority. This interplay underscores the significance of strategic foresight and interpersonal dynamics in fundraising. It underscores the importance of tactfully managing investor rights while nurturing a collaborative and fair investment atmosphere.

A pro rata right allows an investor to keep their percentage ownership in your company by joining future funding rounds. This prevents their ownership from being diluted by new investors. Investors tend to favor pro rata rights because they offer more control and potential for increased return. On the other hand, restricting or waiving these rights can benefit the founder by providing more flexibility and negotiating power.

Pro rata rights are essentially a safeguard for investors, ensuring that they can maintain their proportional ownership in a company as it grows and attracts additional funding. When an investor holds pro rata rights, they have the option to participate in future rounds of funding to preserve their ownership stake. Pro rata rights can be seen as a double-edged sword. While they offer protection and the ability to maintain ownership, they can also place a financial burden on the investor if they're obligated to invest more capital than they initially planned.

A pro rata right allows investors to maintain their ownership percentage in the company by participating in future rounds of funding. This right enables investors to protect their stake from dilution caused by the issuance of new shares to incoming investors. By exercising their pro rata right, investors can preserve their ownership percentage and potential upside in the company. While advantageous for investors as it provides them with more control and potential returns, founders may prefer to limit or waive pro rata rights to retain flexibility in future financing rounds and negotiate terms that best serve the company's interests.

Pro Investor: Pro rata rights allow existing investors to maintain their ownership% in the company by investing additional funds in future rounds of funding. It acts as reward for early investor to reap fruits from growth & success of Investee company. Without pro rata rights, existing investors risk dilution as new investors come in Pro Investee: Pro rata rights provides stability & continuity to the beneficiaries of seed funding. Aware of the option for existing investors to continue investing in subsequent rounds, it provides a sense of confidence & continuity in the company's growth trajectory It ensure that Investee company has access to additional capital when needed for expansion, product development, or other strategic initiatives

Define trigger events in the SAFE agreement that determine when the conversion of SAFE notes into equity will occur. Common trigger events include a priced equity financing round, change of control, or dissolution of the company. Specify the terms and conditions under which each trigger event will activate the conversion of SAFE notes, providing clarity and certainty for both investors and the company.

Define specific events that would trigger the conversion of the SAFE into equity, such as the company raising a certain amount of financing or achieving a predetermined milestone.

Make sure you have REAL trigger events in the SAFE agreement that determine when the conversion of SAFE notes into equity will occur. Too many founders include trigger events that may seem good on paper but aren't really moving the needle or the company in the right direction in terms of scalability, valuation, and growth.

Trigger events are key moments that prompt the conversion of a SAFE (Simple Agreement for Future Equity) into equity in a startup. These events typically include a priced round of funding, an IPO, a change of control, or the dissolution of the company. It's crucial for both the startup and the investor to agree on the specific trigger events and how the conversion will be calculated. This agreement might involve considerations such as valuation caps, discount rates, or time-based triggers. Essentially, trigger events outline the terms under which the investor's SAFE investment transitions into actual equity ownership in the company.

It's important there is always a time period for conversion in a SAFE, as the next trigger event, such as an investment round, might never happen. This ensures that the investment is not left in uncertainty indefinitely and provides clarity for both the startup and the investor.

In the SAFE agreement, trigger events are defined as the occurrences that signal when the conversion of SAFE notes into equity will take place. Typical trigger events encompass a priced equity financing round, change of control, or dissolution of the company. Outline the specific terms and conditions governing each trigger event, ensuring clear and definite guidelines for both investors and the company regarding the activation of SAFE note conversion.

Trigger events refer to specific situations that initiate the process of converting the SAFE into equity. A common example of a trigger event is a priced funding round, which involves raising capital through the sale of equity at a set valuation. Additional trigger events might include an Initial Public Offering (IPO), a company restructuring, or a company dissolution. You and your investor must have a mutual understanding of what defines a trigger event and how the conversion process will be determined. The significance of trigger events affects both parties, as they dictate when and how the investor will transition to being a shareholder in your company.

In addition to what others have said regarding trigger events, it can be useful to put some kind of minimum amount of financing in order to allow you to raise a bridge round if necessary, without converting the SAFE.

Investee companies should identify key milestones such as product launches or revenue targets to leverage trigger events effectively. Plan and execute strategies to attain such milestones, projecting progress to investors and stakeholders. Showcase the significance of trigger events to attract further investment, partnerships, and talent. Leverage this within negotiations for favorable terms in subsequent funding rounds. Align trigger events with overall strategic objectives to enhance valuation and credibility in the market.

Trigger events determine when the SAFE agreement converts into equity or triggers specific outcomes. Common trigger events include a priced equity financing round, acquisition, or specific revenue milestones. Let's structure trigger events that align with the startup's growth trajectory, such as reaching product development milestones, securing key partnerships, or achieving user acquisition targets. These events signal progress and success, leading to the conversion of the SAFE agreement into equity.

Por favor: COLOQUE A CLÁUSULA DE CONFIDENCIALIDADE! Era essa a contribuição! Cansei de ver empreendedor se dando mal por esquecer-se de colocá-la no contrato! O problema é que depois é tarde demais!

For those interested in a comparison with other markets: SAFE (Simple Agreement for Future Equity) in the US and BSPCE (Bons de Souscription de Parts de Créateur d'Entreprise) in France both aim to support startup financing and incentivization but differ due to their respective legal and financial systems. SAFEs are flexible instruments for investors, converting into equity under specific conditions without fixed interest or maturity, and are widely used across the US startup ecosystem. In contrast, BSPCEs are warrants used primarily within French startups to grant employees and sometimes investors the right to purchase shares at a predetermined price, offering tax advantages and promoting employee participation in company growth.

This clause outlines the confidentiality obligations of both parties, ensuring that sensitive information shared during negotiations or through the course of the agreement remains confidential and is not disclosed to third parties without consent.Specify how any disputes arising from the agreement will be resolved. This could involve arbitration, mediation, or litigation in a specific jurisdiction, depending on your preferences and the nature of your business relationship with the investor.

This clause delineates the confidentiality responsibilities of both parties, safeguarding sensitive information exchanged during negotiations or throughout the agreement's duration from disclosure to third parties without consent. Additionally, it specifies the resolution mechanism for any disputes arising from the agreement. This may entail arbitration, mediation, or litigation in a designated jurisdiction, depending on your preferences and the nature of the business relationship with the investor.

Determine se o SAFE incluirá um desconto no valuation futuro da startup ou um valuation cap, que estabelece um limite no valuation da startup no momento da conversão do SAFE em participação acionária. 4. Termos de Conversão: Estabeleça os termos nos quais o SAFE será convertido em participação acionária, como uma futura rodada de financiamento, venda da empresa ou evento de liquidez.

SAFE probably only works when there is a strong expectation that the startup will be able to raise a round of equity financing in the near future (usually much less than one year). If the expected equity raise occurs after the SAFE due date, the startup has tough negotiations to convince SAFE investors to extend the deadline. Moreover, future equity investors may then be tempted to add covenants so that SAFE owners do not get too advantaged.

The best thing about SAFE is that has fixed structure and legal wording. Everything is taken care of and it is a good opportunity to save on your legal bills. It is accepted as an industry standard for early stage rounds (I know cases when a company closed a $70M Series A in SAFE notes, though). It also gives founders some peace of mind that the investors will not ask for money back if the startup doesn’t really take off but is still alive and has cash. Regular convertible notes have such provisions. There is always a chance that you miss with your valuation cap estimate, but the risk of dilution exists with all other instruments, too, when it comes to downrounds

Consult with legal professionals experienced in startup financing to ensure that the SAFE agreement complies with relevant regulations and adequately protects the interests of both parties. Clearly communicate the terms of the SAFE agreement to all parties involved to avoid misunderstandings or disputes in the future.

One of the more critical aspects of a SAFE for investors and entrepreneurs is whether it is Pre-Money or Post-Money. In 2024, most investors should only consider a post-money safe as a post-money SAFE sets a fixed ownership percentage for the investor, but a pre-money SAFE does not. If you have multiple pre-money SAFEs, they will end up mathematically affecting each other, and an investor will not have certainty of their actual ownership percentage until a priced equity round is raised.

Save yourself some legal expenses by using the YC SAFE template, which is pretty much industry standard and provides a decent level of advantages to founders.

Simplest answer that works for most startups: Just use the YCombinator SAFE. Everyone knows whats in it, they're comfortable with it, and it's simple.

Unless you have to do it in order to save your company, do not stack SAFEs on top of one another. Raising money can be expensive, but not having a good sense of what your cap table actually looks like is a disaster waiting to happen.

SAFE variations to consider: a) using both valuation cap and discount, to net SAFE investor maximum # of shares at conversion in a future round; b) consider a conversion skip (of SAFE to equity shares) to next subsequent round, so "skips" current round, useful if current round capital follows SAFE quickly and/or amount to be raised is low versus longer term needs; and c) promote transparency to capitalization table and dilution effects if using multiple SAFE investors prior to conversion round (YCombinator refers to this as "post money" SAFE form).

The simplicity of a SAFE can also be the kink in its armor. It's so easy to raise money on a SAFE that come conversion day, founders can find themselves giving away more than they realize, heavily diluting equity. Track impacts to your cap.