Raising seed capital is an exercise many startups will need to go through. It is important to remember that funding is a means-to-an-end. Funding isn’t indicative of success, rather it enables your startup to scale. So the question arises, what is the most effective method to raise money from investors with the least amount of admin? After all, the more time you as a founder spend trying to raise, the less time you spend on what matters, the business.

This post focuses on a relatively new legal agreement known as a simple agreement for future equity (‘SAFE’).

The essentials of a SAFE

What is it?

A SAFE is a convertible loan without the debt element. Practically,  this means an investor will give you money now in exchange for a promise from your startup that you will give shares to the investor when a pre-agreed trigger event occurs. Usually, this will be when you raise money on a priced round, but it can also be on the sale of the company for example.

It is only the existing shareholders that can get dilluted, the later safe investors do not dilute the earlier safe investors

What it is not

As already mentioned, a SAFE is not debt. Convertible debt is a different instrument. Debt generally has an interest rate attached to it and a maturity date on which the debt needs to be repaid.

Why do investors like SAFEs?

The price of the equity that an investor will receive on their SAFE’s conversion is lower than the price of the shares issued to VC investors.  This is a good segway to the different ways in which you can draft a SAFE.

Different flavours

It is important that you understand the three different versions of a SAFE as they have important nuances that will affect share delusion down the line.

  1. Discount rate – you can offer the investor a discount on the series A share price. So for example, instead of capping the valuation at R40 m, you put in place a 20% discount.
  2. Uncapped – the investor gets the same price as the price round investors. This is very uncommon as early-stage investors want to be rewarded for the risk they are taking.
  3. Uncapped with the ‘most favoured nation’ clause – you do not agree to a cap with your investor, but if you raise money from other investors, your investor will be subject to the most favourable terms that you agree to with other investors.

In the light of the above, there are only a few things you are going to negotiate with an investor:

  • how much money the investor will put into the company;
  • the discount rate; and
  • at what valuation cap.

Need a SAFE?

If you are interested, please complete the form on the right or enquire now. We will contact you to find out more about your requirements and give you a quote.