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SAFE stands for Simple Agreement for Future Equity. It is a legally binding agreement between a business and its investors, stating that both parties accept the exchange of cash investments in return for future shares in the company.
In this post we’ll explore how SAFE agreements work to help you determine whether or not you need one for your business.
Safe agreement explained
Many startups require funding but don’t have adequate valuation and financial performance metrics to attract investors in the traditional sense.
Startups therefore often look to SAFE investors to provide cash funds in the fledgling stages, allowing them to postpone the valuation of the business until a future date, once the company has grown and begun to generate revenue.
All being well, the company therefore receives funding early on, and investors see a return on their investment in the form of equity and ownership in a profit-generating company.
What is included in SAFE agreements UK?
In order that both investors and companies know their rights and expectations, there are several elements which should be included in a simple agreement for future equity. These include:
Statement of terms under which the investment will convert into equity
The rights of the business to buy out contributions in lieu of turning them into equity
Any rights the investor has should the company dissolve or discontinue
Details about the say investors have in the running of the company
A valuation cap which determines the maximum amount of equity an investor will receive
Why SAFE agreements should be carefully negotiated
SAFE agreements are supposed to be straight-forward. Indeed, that’s what ’S’ stands for. However, they should not be taken lightly. Indeed, not being attentive enough when negotiating SAFE agreements can lead to major pitfalls down the line. Before anything is signed, both parties should ensure each term of the contract is clearly understood and agreed upon. When terms are vague or not fully understood by either investor or business, issues will inevitably arise. Avoid this by being thorough and careful when negotiating a SAFE contract.
How to know if your business needs a SAFE agreement
SAFE agreements offer an easy alternative for acquiring early funding. If you want to avoid the comparative complexities of other seed funding options, such as convertible notes, SAFE agreements may be the way to go.
In fact, they come with a slew of advantages. These include:
No debt - From a company perspective, SAFE agreements are hugely attractive due to the fact they avoid the accumulation of debt. If the company fails, the owners are not required to repay the investor their investment.
Fewer legal costs - Setting up a SAFE contract is fairly straightforward from a legal perspective, compared to convertible notes, for instance. This can result in far less burdensome legal costs.
Less paperwork - As they don’t require a maturity date or come with an interest rate attachment, SAFE contracts involve significantly less time-consuming paperwork.
However, a SAFE agreement should only be entered into when both parties are 100% sure of what they’re getting into. Inexperienced Startup founders should avoid SAFE contracts unless they’re confident and clear on all the terms of the contract. Before opting for a SAFE agreement, seek out legal and/or financial advice to determine whether or not it’s the right option for you.
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