Hi, I'm Jesse Jones founder of Fourscore
Business Law. Thanks for tuning in to
this quick video on convertible
securities. We're really only going to
cover one topic on this video and that
is the SAFE. SAFE is an acronym. It stands
for Simple Agreement for Future Equity. I
like to think of SAFEs sort of like
convertible notes. They are
different. They are not debt. There is no
repayment obligation to the
company or the entrepreneur, and you sort
of boil it down to this: investor is
going to invest a certain amount of
money in the company, and they're all
going to agree what percentage of the
company that's worth sometime later. It
sounds pretty crazy to a lot of people,
but it's actually used a lot on the west
coast. It's very fast.
Similar to convertible notes, you don't
have to deal with a lot of negotiating
over the valuation of the company,
because you're not determining the
percentage that you're buying for the
investment amount today. So, the valuation
negotiation gets kicked down the road to
the next financing. And then also similar
to notes- the SAFE will convert into
equity most of time at a discount,
maybe at a cap just like a note or both-
either/or or both.
Just as a quick refresher the discount
is essentially a discount on the price
per share that is sold in the next
financing, and the valuation cap is the
number that would be put into the SAFE
that basically says the company won't
use a value higher than X upon
conversion. So, that valuation cap just
like in a note will give the investor a
little bit more comfort if they're going
to get reasonable terms later. It's not a
full-fledged negotiation on the
valuation of the company, but it does
give them a little bit of comfort for
the investor. And then convergent- the
states can convert just like notes into
shares of the preferred stock that's
being sold in the qualified financing, or
they can convert into a shadow series.
And so just as a refresher on that, if
it's the exact same shares, it literally
gets converted into
shares that are being bought in the
future by those next investors. A shadow
series is most typically exactly the
same. The rights are all exactly the same.
The only difference is really the
liquidation preference so the amount of
liquidation preference, for instance, if
the next investors buy stock at $1 a
share, you know, because the discount
comes into play for the safe investor,
they would get converted into that stock
at 80 cents per share, let's say with a
20% discount, and so instead of having $1
liquidation preference per share the
safe investor that's converted into a
shadow series would have a liquidation
preference of 80 cents per share, so
basically the same amount that they paid.
That's viewed as a little bit more fair,
and it avoids sort of this built in gain
that those first investors would have on
their investment in the event that the
company doesn't do well on this sort of
liquidated. That's it for SAFEs. For
more information on venture financing
check out our Whitepaper on fourscorelaw.com.
Thanks.
