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A SAFE note template is a financial instrument that allows creators to raise funds without the hassle of assigning an immediate valuation to their business. It has become increasingly popular amongst startups and businesses looking to raise seed capital. The SAFE note is a convertible security, which permits investors to offer funding in return for their right to convert their investment into equity at some point in the future, usually during a subsequent round of funding or when a certain event arises. Let us continue with this discussion to learn more about SAFE note templates.
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A Pre-Money SAFE Note is a financial instrument used by startups and investors in early-stage funding. It's an agreement that provides investors the right to purchase equity in the company at a future date, typically during a future equity financing round, sale, or IPO.
The terms "Pre-Money" refer to the valuation of the company before the current round of financing. This means the valuation would not take into account the money invested in the financing round. For example, if the company receives a valuation of $10 million to raise $2 million, the "Pre-Money" valuation is $10 million and "Post-Money" valuation is $12 million (includes the money from the financing round).
- Discount: This is a feature that gives investors a discounted price compared to what later investors pay in a future financing round. For example, if a SAFE note carries a 20% discount and the price per share in the next funding round is $1.00, the SAFE holder would be able to convert their investment into equity at $0.80 per share. This discount compensates early investors for their higher risk.
- Valuation Cap: The valuation cap is a maximum valuation at which the SAFE can convert into equity. This protects investors from over-dilution if the company's valuation increases significantly before the SAFE converts. For example, if a SAFE has a valuation cap of $5 million and the company's valuation in the next funding round is $10 million, the SAFE holder’s investment converts as if the company was valued at only $5 million, offering more shares for the same investment compared to later investors.
A Pre-Money SAFE Note is a financial instrument used by startups and investors in early-stage funding. It's an agreement that provides investors the right to purchase equity in the company at a future date, typically during a future equity financing round, sale, or IPO.
The terms "Pre-Money" refer to the valuation of the company before the current round of financing. This means the valuation would not take into account the money invested in the financing round. For example, if the company receives a valuation of $10 million to raise $2 million, the "Pre-Money" valuation is $10 million and "Post-Money" valuation is $12 million (includes the money from the financing round).
- Valuation Cap: The valuation cap is a maximum valuation at which the SAFE can convert into equity. This protects investors from over-dilution if the company's valuation increases significantly before the SAFE converts. For example, if a SAFE has a valuation cap of $5 million and the company's valuation in the next funding round is $10 million, the SAFE holder’s investment converts as if the company was valued at only $5 million, offering more shares for the same investment compared to later investors.
A Post-Money SAFE Note is a financial instrument used by startups and investors in early-stage funding. It's an agreement that provides investors the right to purchase equity in the company at a future date, typically during a future equity financing round, sale, or IPO.
The terms "Post-Money" refer to the valuation of the company after the current round of financing. This means the valuation would take into account the money invested in the financing round. For example, if the company receives a valuation of $10 million to raise $2 million, the "Pre-Money" valuation is $10 million and "Post-Money" valuation is $12 million (includes the money from the financing round).
- Discount: This is a feature that gives investors a discounted price compared to what later investors pay in a future financing round. For example, if a SAFE note carries a 20% discount and the price per share in the next funding round is $1.00, the SAFE holder would be able to convert their investment into equity at $0.80 per share. This discount compensates early investors for their higher risk.
- Valuation Cap: The valuation cap is a maximum valuation at which the SAFE can convert into equity. This protects investors from over-dilution if the company's valuation increases significantly before the SAFE converts. For example, if a SAFE has a valuation cap of $5 million and the company's valuation in the next funding round is $10 million, the SAFE holder’s investment converts as if the company was valued at only $5 million, offering more shares for the same investment compared to later investors.
A Post-Money SAFE Note is a financial instrument used by startups and investors in early-stage funding. It's an agreement that provides investors the right to purchase equity in the company at a future date, typically during a future equity financing round, sale, or IPO.
The terms "Post-Money" refer to the valuation of the company after the current round of financing. This means the valuation would take into account the money invested in the financing round. For example, if the company receives a valuation of $10 million to raise $2 million, the "Pre-Money" valuation is $10 million and "Post-Money" valuation is $12 million (includes the money from the financing round).
- Discount: This is a feature that gives investors a discounted price compared to what later investors pay in a future financing round. For example, if a SAFE note carries a 20% discount and the price per share in the next funding round is $1.00, the SAFE holder would be able to convert their investment into equity at $0.80 per share. This discount compensates early investors for their higher risk.
- Valuation Cap: The valuation cap is a maximum valuation at which the SAFE can convert into equity. This protects investors from over-dilution if the company's valuation increases significantly before the SAFE converts. For example, if a SAFE has a valuation cap of $5 million and the company's valuation in the next funding round is $10 million, the SAFE holder’s investment converts as if the company was valued at only $5 million, offering more shares for the same investment compared to later investors.
A SAFE Note is a financial instrument used by startups and investors in early-stage funding. It's an agreement that provides investors the right to purchase equity in the company at a future date, typically during a future equity financing round, sale, or IPO. Given this SAFE Note has no valuation cap included, it does not need to reference "Pre-Money" or "Post-Money" since the valuation at the triggering event will not impact the price the investors shares are converted. It will only be converted at the discount.
- Discount: This is a feature that gives investors a discounted price compared to what later investors pay in a future financing round. For example, if a SAFE note carries a 20% discount and the price per share in the next funding round is $1.00, the SAFE holder would be able to convert their investment into equity at $0.80 per share. This discount compensates early investors for their higher risk.
Steps to Draft a SAFE Note Template
Creating a SAFE note involves numerous steps to ensure its effectiveness and compliance with legal requirements. Here is how one can create a SAFE note template:
- Seek Legal Advice. Engage lawyers who specialize in startup financing to assist in guidance and observance of said rules.
- Change Model. Take into account factors like industry practices, objectives regarding raising funds, target investors, etc., while modifying the model of the Simple Agreement For Future Equity Note (SAFE) form so that such a document meets the real needs of start-ups.
- Define Key Terms. All terms contained within the SAFE note template should be defined to avoid potential disputes and confusion. Ensure that definitions are clear and specific.
- Incorporate Essential Clauses. The document must include clauses such as discounts, valuation caps, most-favored-nation provisions, and pro-rata rights. These terms should reflect the business venture's intention and industry best practices.
- Review and Modify. This is for accuracy, comprehensiveness, and legal conformity purposes, during which necessary adjustments can be made to the SAFE note template.
Before finalizing the agreement, it is recommended that legal experts’ views be sought, and input from prospective investors at this stage can improve the quality of such a document by introducing valuable information from those with relevant experience in this sector.
Benefits of a SAFE Note Template
It has been demonstrated that employing a standard simple agreement for future equity (SAFE) note template provides many benefits for both start-ups and investors. By establishing an efficient framework of investment agreements, the fundraising process can be made more streamlined and thus efficient. Some of these advantages are:
- Simplicity: SAFE notes tend to be brief, less than five pages, which makes it easy for all parties involved to understand. Unlike convertible notes, SAFE notes do not have complicated sections such as maturity dates and interest payments, which simplify negotiations.
- Protection: Provisions protecting the interests of both startups and investors exist in SAFE notes. They protect all parties against potential future events like change in control, early exits, company dissolution, or bankruptcy.
- Limited Negotiations: Accounting is simplified under SAFE notes. Hence, negotiation becomes easier. The main areas where negotiations may occur include the discount rate and valuation cap making the negotiation exercise simple and short.
- Flexibility for Company Owners: Unlike loans with set repayment obligations, there are no fixed terms to repay SAFE note owners. This allows founders of new enterprises to concentrate on expanding them instead of focusing on paying off debts immediately.
- Investor Incentives: Investors who purchase SAFE notes can convert them into discounted preferred stock. It helps in the accounting management of start-up companies when they incorporate SAFE notes among other equities structures.
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Essential Features of a SAFE Note Template
The equity conversion within the SAFE note template is influenced by several important features. Both fledgling companies and investors should understand these characteristics. The primary features of a template for SAFE notes include:
- Discounts: These discounts can be used as leverage by early-stage investors during subsequent rounds, where they acquire shares at lower prices than those obtained in other financing circles by providing discounted converted equity.
- Valuation Caps: A valuation cap sets forth the highest price at which the SAFE note can be converted into stock options. In this way, it guarantees that per share, the investor will receive the highest possible price even if the company’s value increases significantly through successive financing cycles.
- Most-Favored Nation Provisions: When there are multiple SAFE notes, the most-favored-nation provision requires notifying first holders of SAFE notes about each subsequent SAFE note’s terms. If provisions relating to the next SAFE note seemed better off for the first holder, they would request them.
- Pro-Rata Rights: With pro-rata rights, an investor may participate in any future round of financing by purchasing new stock. Their absence leads to dilution, i.e., when additional money is poured into one fund and another stake falls.
The nature of SAFE notes depends on many factors, such as investors’ pool and evaluation and the needs of the parties involved. The arrangement must adapt to specific circumstances.
Considerations for Creating a SAFE Note Template
Before developing a SAFE note template, it is critical to take into account several things to ensure that it meets the organization’s needs while also complying with legal requirements. The key considerations for creating a SAFE note template are as follows:
- US Laws Compliance: The SAFE note template should be written following applicable US laws and regulations for its enforceability and validity. Startup finance law professionals’ advice is highly recommended.
- Customization: Startups must adjust the SAFE note template to suit their circumstances, taking into account sector standards, target investors, and fundraising goals. This modification of the business can align it more closely with relevant industry decisions.
- Unambiguity: Clear definitions for terms used in the SAFE note template must be provided so as not to confuse or deceive anybody. By defining these terms now, there will be no fights over them later and the conversion process will go on smoothly.
- Investor Safeguards: Entrepreneurs should aim at protecting themselves even when they offer SAFE notes that benefit investors. These might include information rights, board observer rights, and transferability restrictions, among others.
A good investment climate and investor incentives are difficult to balance during future fundraising campaigns.
Key Terms for SAFE Note Templates
- Buyer’s Price: The amount at which the owner will purchase shares upon exchange of the SAFE note for cash.
- Conversion Trigger: Any occurrence or set of conditions that can lead to the translation of SAFE note into equity, e.g., subsequent funding round and liquidity event.
- Conversion Discount: This is represented by a cut-rate applied on future price per share in SAFE notes to enable them to buy at a cost lower than that expected in later times.
- Valuation Cap: The maximum conversion price of a SAFE note can be made into equity. It ensures that buyers receive shares at their best cost per share.
- Conversion Mechanics: The processes and requirements involved in converting a SAFE note into stock, such as the necessary documentation, timeline, and entitlements relating to each party.
Final Thoughts on SAFE Note Templates
Companies can raise funds from SAFE notes easily. The investors who get in during the early stages are attracted for good reasons. With a proper understanding of the features, benefits, important considerations, and key terms associated with SAFE notes, entrepreneurs and investors can make informed decisions on the appropriate fundraising strategies. To come up with an industry-conforming SAFE note form that suits your company’s needs hence it is important to consult lawyers and seek legal advice as much as possible.
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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
