A SAFE Agreement, or Simple Agreement for Future Equity, is a type of contract used in startup investing. It’s a way for investors to provide capital to a startup in exchange for a percentage of the company’s future equity.
SAFE Agreements are popular among startup investors because they’re simple to execute and don’t require the same legal and financial due diligence as traditional investment contracts.
The Pre-Money and Post-Money SAFE Agreements are the newer investment agreements that have been gaining popularity among startup investors and entrepreneurs. Besides having such agreements, startups should also focus on the entire legal checklist. Keep reading to learn how the both compare and pros and cons of Post money SAFE agreement.
Pre-money SAFEs provide investors with a convertible security that can be converted into equity in the future. In contrast, post-money SAFEs provide investors with a set amount of equity in exchange for their investment.
Pre-money SAFEs are generally best for raising smaller amounts of capital, while post-money SAFEs are best for larger rounds.
Pre-money SAFEs reduce the investor’s risk, as the investor does not receive any equity until the company is valued during a future financing round. Post-money SAFEs provide the investor with immediate equity.
When compared to a convertible note, a SAFE note is preferable. A company will have to repay a convertible note as a loan in cash or shares. On the other hand, a SAFE note doesn’t incur any debt.
Another benefit in a SAFE vs convertible note situation is SAFE notes are applicable until the subsequent funding, whereas convertible notes come with a maturity timeline.
Ultimately, pre- or post-money SAFE should be evaluated carefully to ensure the best possible outcome. Most investors go for a post-money SAFE gives as it offers a better idea of their ownership percentage.
In some cases, conversion math on post-money SAFEs may change if there’s a discount rate.
There are many pros of a post-money SAFE Agreement. Some of the most notable benefits include
Both founders and investors have additional certainty with post-money SAFE upon conversion. Founders benefit with respect to expected dilution, and investors have a better ownership level.
There’s a high conversion rate under post-money SAFEs in comparison to pre-money SAFEs. The conversion rate is calculated using the valuation cap and company capitalisation. Since the company capitalisation is lower, the equity round is limited, increasing the conversion rate.
A SAFE Agreement provides a clear and concise way for all parties to understand the contractual agreement. Besides, it ensures contract details are securely stored and cannot be edited or modified without the consent of all parties.
Post-money SAFE investors will get protection with shareholder treatment along with 1x liquidation preference. However, they must be aware of liquidation rights and hire a lawyer to understand the details.
One potential downside is that the post-money SAFE Agreement can not offer secure pro-rata rights during equity financing. In this case, investors must negotiate the pro-rata rights beforehand and note when the next fundraising is for the allocation of capital wisely.
The ownership stake in the post-money SAFE can only be determined at the beginning of the funding. However, this ownership stake may transfer and get diluted by new investors coming in during the next funding. Additionally, parties that enter into a Post-Money SAFE Agreement may be somewhat limited in their ability to enforce their rights and remedies in the event of a dispute.
When considering a SAFE Agreement, it’s vital to consider specific needs and goals. The pre-money SAFE Agreement can be an excellent fit for businesses that want to minimise their upfront cash investment while still retaining some ownership in the company. Besides, knowing about common legal issues may be helpful when handling a business.
However, it’s essential to note that the SAFE Agreement does not provide the same level of protection as other investment vehicles, such as a traditional loan or venture capital investment.
Overall, the Post-Money SAFE Agreement offers a number of benefits for both startup investors and entrepreneurs to raise money safely. Also, consider the few potential drawbacks before entering into such an agreement. You may hire an attorney to help you draft a solid agreement and choose the right option. Contact Mishoura to connect with professionals to assist you throughout the process.
