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Start-up capital raising using a SAFE note

Nine Dots Legal

10 • 11 • 22

Laszlo Konya, and Moe Osman
Commercial Law, Corporate Law

Start-up capital raising using a SAFE note

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.

Key features

  • 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)

Get in contact with us

Laszlo Konya | Head of Commercial + Corporate | NDL

Laszlo Konya

Head of Commercial + Corporate

m. +61 416 229 054
d. +61 3 9448 9992

Moe Osman - Commercial + Corporate Lawyer

Moe Osman

Commercial + Corporate Lawyer

m. +61 422 586 122
p. +61 3 9110 2900

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