WHAT IS SIMPLE AGREEMENT FOR FUTURE EQUITY (SAFE)

Simple Agreement For Future Equity, commonly referred to as SAFE is an instrument through which an investor acquires rights to a certain number of equity shares on the happening of a particular future event such as the immediate next funding round, dissolution, or expiry of the prescribed time period. SAFE defers the problem of valuation for an early-stage startup. It provides an alternative to equity & debt instruments combining the best of both worlds.

1. Key Features of Simple Agreement For Future Equity (SAFE)

SAFE does not carry any interest payment or capital repayment obligation thereby providing sufficient flexibility to entrepreneurs.
It is an agreement through which the investor provides capital to a Company in exchange for equity shares which will be valued at a later date.
It provides an alternate route to equity & debt instruments.
Since it is not a debt, it does not have any maturity. Instead of maturity, they are converted into equity shares on the happening of a particular event.

2. Advantages of SAFE:

As stated above, Simple Agreement For Future Equity does not carry an interest rate that enables entrepreneurs to raise funds without disturbing the cash flow.
SAFE solves a major problem of valuation of a company during the funding process. It provides that the valuation of the company can be in the future on the happening of a particular event such as the next funding round, dissolution, merger/acquisition,
It is a simple agreement that can be executed without requiring any specialized & complicated legal support.
It serves as a tool for investors in making early investments in startups that have a significant potential of growth.
It helps small entrepreneurs in research and development activities thereby helping the economic growth of the country.

3. Disadvantages of SAFE:

A limited amount of funds can be raised through SAFE.
Early conversion could lead to unnecessary dilution.

Key Terms of a Simple Agreement For Future Equity Agreement:

Discount: This clause provides that a certain percentage of discount is given to SAFE Investor when the founders raise funds in the next funding round. For example, if a discount of 20% on valuation is given to a SAFE investor in the funding round with a company valuation of Rs. 10 lakh, he will be able to convert the SAFE as if the company is valued at Rs. 8 lakh.
Valuation Cap: This clause puts a cap on the maximum limit of valuation which shall be considered for converting the SAFE into equity irrespective of valuation taken during the next funding round. For example, if the valuation of the company is Rs. 10 lakh and the valuation cap is Rs 8 lakh it allows the investor to convert equity at a valuation of Rs. 8 lakh.
Most Favored Nation (MFN) Provisions: This clause allows the investor to enjoy the same rights and privileges which was awarded to any future investor.

SAFE Issue in India:

Companies Act, 2013 does not specifically provide for the issue of SAFE. It can be issued in the form of Compulsorily convertible Preference Shares (CCPS). The following process should be followed to issue SAFE/CCPS:

Board Meeting and Extraordinary General Meeting shall be conducted to Amend the Memorandum of Association
Alteration of the Memorandum of Association shall be made to include the Preference Share Capital
Form SH-7 shall be filed with the Registrar of Companies within 30 days of the Amendment of MOA
Board Meetings shall be conducted to issue CCPS either through private placement or rights issue.
In the case of Private Placement, the funds shall be deposited in a separate bank account opened for this purpose.
Board meetings shall be conducted to allot securities to investors.
Form PAS-3 shall be filed with the ROC within 30 days of its allotment.

Disclaimer:

The information provided in this content is for general informational purposes only. You should always seek the advice of an expert before making any decisions based on the information provided. We do not warrant or guarantee the accuracy, completeness, or usefulness of the information provided. Any reliance you place on such information is strictly at your own risk. We are not responsible for any damages, losses, or expenses related to the use of this content.