Can you explain this SAFE agreement to me?

Hi there! My name is Dolan, and I’d be happy to help with this. I carefully review each question and provide responses based on my years of hands-on experience as a lawyer.
SAFE agreements (Simple Agreements for Future Equity) are a way for startups to raise money. Investors provide funding in exchange for a promise of equity in the company at a later date, typically triggered by a future financing round or liquidity event.
If you could provide a bit more detail about the SAFE you’re reviewing (like the valuation cap, discount rate, or any clauses that stand out) I can help you break it down further.

Great question! Let me explain:
1. Valuation Cap: This sets the maximum valuation at which your investment will convert into equity, regardless of the company’s valuation during a future financing round. If the company’s valuation exceeds $3M, you still convert as if it’s valued at $3M.
2. Discount Rate: The 20% discount applies to the price per share in a future equity round. You would receive shares at 80% of the price others pay during that round.
Essentially, the valuation cap and discount rate protect your investment by giving you better terms than new investors in the triggering round.
Does that make sense so far?

Good question! Usually, it’s whichever gives you the better deal—the lower price per share.
When the company raises money in a priced equity round, the SAFE agreement will calculate your conversion based on both the valuation cap and the discount. The terms that result in the lowest price per share for you will apply.
For example, if the round’s valuation is $10M:
- Valuation Cap: Your SAFE assumes a $3M valuation for conversion.
- Discount Rate: You get a 20% discount on the $10M valuation price per share.
Whichever method results in more shares for your investment is the one they’ll use.
Do you have numbers from the company’s current round, or are you still reviewing?

Got it. Let’s do the math:
1. Price Per Share in the Round: If the company raises $5M at a $10M valuation and issues 1M shares, the price per share is $10 ($10M / 1M shares).
2. Using the Valuation Cap: Your $3M valuation cap reduces the price per share to $3 ($3M / 1M shares).
3. Using the Discount Rate: Your 20% discount reduces the $10 price per share to $8.
Since $3 is lower, the valuation cap applies, and your SAFE converts at $3 per share.
How much did you invest in the SAFE?

Perfect. Here’s how many shares you’d receive:
- $50,000 / $3 (valuation cap price per share) = 16,667 shares.
If the discount applied, you’d only get:
- $50,000 / $8 = 6,250 shares.
So, the valuation cap gives you significantly more shares. Does this help clarify how it works?

Great question. If the company doesn’t raise another round, your SAFE typically wouldn’t convert into equity unless there’s a liquidity event, like:
1. A sale or acquisition of the company.
2. An IPO (initial public offering).
If the company dissolves without reaching a triggering event, you might only recover your investment if there are remaining assets after debts are paid.
Did the SAFE mention a maturity date or any specific clauses for handling non-conversion?

Here are a few key things to review in your SAFE agreement:
1. Valuation Cap and Discount: Ensure these terms align with your expectations.
2. Pro Rata Rights: Do you have the right to maintain your ownership percentage in future rounds?
3. Conversion Triggers: Confirm what events cause the SAFE to convert into equity.
4. Dissolution Terms: Check how your investment is treated if the company dissolves before conversion.
5. MFN Clause (Most-Favored Nation): This ensures you receive the best terms if the company issues other SAFEs with better conditions.
Would you like me to walk you through any of these in more detail?

Pro rata rights give you the option to invest additional money in future financing rounds to maintain your ownership percentage.
For example, if you own 5% of the company after your SAFE converts, pro rata rights let you invest in the next round to keep that 5% stake.
Check if your SAFE includes a section labeled “Pro Rata Rights” or something similar. If it’s missing, you might want to negotiate for this right in the future.
Do you see anything about that in your agreement?

Not necessarily bad, but it means you’d lose the ability to maintain your ownership percentage as the company raises more funding.
If this is important to you, you could consider negotiating an amendment to the SAFE or discussing it with the company before they raise their next round.
How significant is maintaining your stake to your overall investment strategy?

You can certainly ask, though the company might not agree if the SAFE has already been executed. It’s more common to negotiate pro rata rights before signing.
That said, if you have a good relationship with the founders, you could frame it as an interest in supporting the company long-term. Let me know if you’d like help drafting a request.

Just one more thing: Make sure the SAFE specifies whether it’s a post-money or pre-money SAFE.
- Pre-Money SAFE: Your ownership percentage is calculated before the new financing round’s investment.
- Post-Money SAFE: Your percentage is calculated after, which could dilute your stake more.
If you’re not sure, I can help you double-check.

Yes, with a post-money SAFE, your ownership is calculated after the new investors come in, which can reduce your percentage.
For example, if the company raises additional funds after your SAFE converts, your stake might be diluted unless you negotiate pro rata rights to invest further.
Does this align with what you expected?

You’re welcome! SAFE agreements can be complex, so I’m glad I could clarify things for you.
If you’re happy with the advice I provided, I’d really appreciate a review! It helps others know they can rely on me for clear, practical guidance.

Thank you so much! Best of luck with your investment. Let me know if you need help down the road. Have a great day!