Safe Agreement Valuation Cap

In the vault, the A Series Preferred is called “Standard Preferred Stock” and the Series A-1 Preferred is called “Safe Preferred Stock”. The analysis below shows a comparison between standard Preferred and Safe Preferred, as described in the company`s deed of incorporation: In all fairness, the investor should have some comfort that if an investment is made, if the company has very little value, the rating is not converted into an astronomical rating, thus depriving the investor, participating in all the bullish potentials resulting from the early investment. So what`s going on? By focusing on the fact that SAFE is fast, simple, and cheap, some founders can simply download, fill in the gaps, and run away in some way. Sure, this is a potentially dangerous way to deal with any legal document, but there`s something about SAFE that makes founders feel safe. Take a situation where a startup sold convertible bonds worth $100,000 without discounts, interest rates at 8 percent, and a $5 million cap, which is automatically converted with qualified funding of at least $1 million. Six months after the bond was issued, the startup sold $US 2 million to Series Seed Preferred Stock for a pre-money valuation of US$8 million. As an example of a valuation cap used for conversion, we assume we have a safe investment of $500,000 with a valuation cap of $5,000,000. In the event of a conversion, the SAFE investor will receive shares at the same value as the equity investor (the investor(s) whose investment triggers the conversion), with the valuation cap acting as a closing to deter the SAFE investor from exceeding this price. The valuation cap is currently based on the pre-money value of equity financing, which means that if the equity funding is valued at USD 2,000,000, the SAFE investor`s investment is included in this amount, which means in our example that the SAFE investor would hold 25% of the issued and pending shares just before the closing of the investment. Another innovation of the safe concerns a “proportional” right. The initial vault required the company to allow safe holders to participate in the funding cycle after the funding cycle into which the vault was transformed (e.g.B.

If the safe has been converted into Series A preferred financing, a safe holder – now holding a sub-series of Series A Preferred Shares – would be allowed to acquire a proportionate portion of the Series B Preferred Shares). While this concept fits the original vault concept, it made less sense in a world where vaults have become independent funding cycles. Thus, the “old” proportional right is removed from the new safe, but we have a new (optional) letter that offers the investor a proportional right in the financing of the Series A Preferred Stock, based on the investor`s as-converted secure ownership, which is now much more transparent. Whether or not a startup and an investor take the secondary letter with a safe is now a decision that the parties will make, and it can depend on a large number of factors. Among the factors to be taken into account, there may be (among others) the purchase amount of the safe and the amount of future dilution that the proportional fee will entail for the founders – an amount that can now be predicted with much more precision if post-money safes are used. The exact conditions of a SAFE vary. However, the basic mechanism[1] is that the investor provides specific financing to the company when it is signed. In return, the investor will subsequently receive shares of the company in connection with certain contractual liquidity events. . . .

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