If you are considering raising money, you’ve likely heard of SAFE (Simple Agreement for Future Equity) Agreements. A SAFE essentially gives you money now with the promise of giving the investor equity in your company in your next round of funding. SAFE’s are good for early stage startups raising seed capital from angel investors, friends, and family before receiving institutional venture capital financing.
Getting a SAFE in place is a two step process. First, a Term Sheet will be drafted laying out the specifics of the funding. Then, the SAFE Agreement (and accompanying agreements) will be drafted – which is more in line with a traditional loan document with plenty of legalese. You should have an attorney review both.
This post will give you a high level overview of the anatomy of a SAFE Term Sheet:
- Offering Terms – this section of your SAFE term sheet lays out the type of securities, and parties involved:
- The Issuer – the startup offering the SAFE
- Security – the type of Security being offered – in this case, future equity.
- Purchasers – the parties investing in exchange for future equity
- Amount – the amount being invested.
- SAFE Terms – this section lays out the terms of the investment itself:
- Conversion Terms – under what circumstance will the SAFE convert into actual equity in your company. The specifics here can be negotiated – but typically, this lays out that the SAFE will automatically convert into equity in the form of Preferred Stock in your next equity financing round (Series A, etc.) as long as the investment is at least a pre-determined amount ($500,000+). A provision can also be added that the SAFE will convert if certain corporate transactions occur (such as a liquidity event).
- Conversion Price – this section will lay out the price per share of the conversion. This is a point of negotiation, but is typically set as the lesser of a predetermined discount rate less than the lowest price per share of shares sold in your next equity financing round, and the price per share implied by a pre-money valuation.
- In plain English, what the discount rate could be – if your Series A investors paid $1 a share, and you offered a 20% discount in your SAFE, then SAFE investors equity converts at $0.80 a share. You’ll negotiate this.
- Offering Mechanics – this section lays out next steps in actually executing the SAFE investment.
- Documentation – lays out what documents will be drafted and who will draft them.
- Amendment – lays out what needs to be done to add more investors to your seed round.
- Investors – identifies that your financing is only open to “accredited investors” as defined by the SEC.
- Expenses – lays out who will be paying for drafting, legal, and other expenses related to the finance.
- Deal Specific Terms
- Your term sheet may have some terms specific to your deal – such as a timeline of delivery, a schedule of expenditures, or agreements around board seats.
Let us Help
This post is just a high level overview of what is in a SAFE term sheet. There are many more nuances and specifics around this.
Kader Law can help you understand your term sheet, your SAFE agreements, and any other loan documents coming your way. If you’re about to raise funding and need some help, feel free to contact us.
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.