What is a SAFE agreement Negotiation?
A SAFE agreement outlines terms for an arrangement in which an investor injects capital into a startup company in exchange for the right to receive stock in the future. Although this is a legal contract, its terms can be negotiated for more favorable arrangements.
Read the rest of this article to explore some key terms in a SAFE agreement you can negotiate, how to approach negotiations for successful outcomes, and how a qualified lawyer can assist you with the process.
What Key Terms in a SAFE Agreement Should You Negotiate?
A SAFE agreement usually contains the following common terms parties can negotiate.
- Investment amount. This is the amount of money the investor will provide to the startup.
- Valuation cap. The maximum company value used to calculate the investor’s price must be considered. Negotiate it by considering market standards and strategic trade-offs.
- Most favored nation (MFN). This provides better terms for the investor if the company offers stock to future SAFE purchasers.
- Trigger event. When the SAFE note is converted into equity must be stated for clarity and to prevent disputes.
- Investor rights. Investors will want to negotiate what rights they have, such as pro-rata rights for a better deal.
What are Tips for Negotiating a SAFE Agreement?
Now that you know of some important terms to check and negotiate in a SAFE agreement, there are ways to prepare for the negotiation and have successful discussions with the other party.
Consider the Company Goals
Startup companies should take time to understand what they want to achieve with their funding and what they are willing to give the investor in exchange for this capital. Your goals should be aligned with your biggest priorities so that you concentrate on them during negotiations.
Negotiate the Discount Rate
Investors will want to negotiate the discount rate, which is the percentage reduction that an investor will get on the share price during conversion so that early investors are compensated for the risk they take. Try to negotiate a discount rate of between 10 and 20 percent, which is reasonable and typical.
Consider Pro Rata Rights
Pro rata rights give the investor the chance to take part in future financing so they maintain their percentage ownership. But, founders will want to evaluate if giving the investor these rights too broadly could complicate their future fundraising.
Think About Trigger Events
You can negotiate a trigger event by amending the definition of what constitutes a qualifying event for conversion. A founder will want a high financing threshold so that a small fundraising won’t trigger conversion, while an investor might push for a lower threshold so that the SAFE doesn’t remain outstanding for an indefinite time while the company raises smaller amounts.
Get a Legal Review
Before entering negotiations with the other party, it’s worth hiring a qualified lawyer to review your SAFE note agreement. They will identify clauses that you should consider negotiating and how this can help you.
To request that a lawyer reviews your SAFE note agreement, use the ContractsCounsel platform. ContractsCounsel is one of the largest online legal marketplaces that gives you access to a curated network of vetted lawyers.
Here’s what to do.
- Go to the ContractsCounsel marketplace, where it’s free to post a project.
- Choose ‘One-time project’ and ‘Contract review.’
- Post your project, with some details of what you require so you match with suitable lawyers. You could specify if there are any specific sections of the agreement on which you’d like the lawyer to pay attention.
- Wait for bids. Lawyers directly on the platform will send you bids to work on the project.
- Review the lawyer information. The platform provides a range of lawyer data, such as their location, expertise, credentials, years of experience, and client ratings.
- Select a lawyer based on the lawyer information. Hire them to review your SAFE note agreement for a flat fee.
Do You Need a Lawyer for a SAFE Note Agreement Negotiation?
You don’t always need to hire a lawyer to help you negotiate SAFE note agreements, but it can be worthwhile. Although a SAFE note agreement can seem straightforward, it can have significant consequences that affect your ownership and rights.
A lawyer will help you during the SAFE note agreement negotiation in various ways, such as by:
- Reviewing your SAFE note agreement and explaining what its terms mean.
- Negotiating the valuation cap and explaining how different caps affect the investor’s equity.
- Discussing the discount rate and considering how it interacts with the valuation cap.
- Checking conversion triggers and explaining exactly when the SAFE note converts into equity.
- Negotiating pro rata rights so that it’s clear if the investor can take part in future financing rounds to maintain their ownership.
- Explaining all transfer provisions, such as if the investor wants to transfer the SAFE note to another party.
- Revising any unclear or one-sided provisions in the agreement, so that your final agreement is clear and fair to both parties.
- Negotiating directly with the other party on your behalf, should this be required.
Where to Find a Lawyer to Negotiate Your SAFE Note Agreement
If you’d like a lawyer to help you negotiate a SAFE note agreement, you don’t have to wonder where to find one who’s reputable and experienced in negotiations.
ContractsCounsel makes it easy to connect with and hire a qualified lawyer. They can review the SAFE note agreement to pinpoint areas to negotiate and formulate effective negotiation strategies that protect your interests.