Start-up capital raising using a SAFE note
A common issue for most start-up businesses is that they are cash hungry. Securing investors in the early days can be complicated and legalistic if traditional methods, such as loans or convertible notes, are used. A Simple Agreement for Future Equity (SAFE) is relatively new in Australia and was developed in the US as a simple form of fundraising in the early stages of a start-up. We have summarised the key features of SAFEs below.
- Under a SAFE, an investor invests in a start-up in exchange for a contractual right to shares in the future upon an agreed trigger event, usually an equity fundraising round.
- The investment is not a debt instrument and does not attract interest.
- There is no repayment or maturity date.
- It is a relatively simple agreement, so the time, expense and complexity of implementation is reduced.
- As an incentive for an investor to enter into a SAFE, it is common for valuation caps and discount rates on conversion to be agreed.
Benefits of SAFEs
- A SAFE does not create a debt or interest liability for the company.
- A SAFE does not have a repayment or maturity date, so there is no pressure on the start-up to refinance or source further funds to repay the investor.
- It is simple to understand and negotiate, and it is flexible.
Cons of SAFEs
- The investor is not a creditor of the company, so it would not participate in any liquidation dividend.
- There is no guarantee or security of equity or return for the investor.
- It is not a revenue stream for an investor, more of a punt.
Things to consider when negotiating a SAFE
- How much is the investment?
- What is the trigger for conversion?
- Is there going to be a discount applied upon conversion?
- What will the founder’s dilution be?
- Is there a valuation cap?
- Draft a Shareholders Agreement now, that is appropriate for the investor to accede to (in the event that shares are issued under the SAFE in the future)
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