SAFE agreements are powerful investing tools. However, there are important terminologies in SAFE Agreement that you must understand.
But before we go into that, what do we mean by SAFE Agreement?
SAFE Agreement Definition
A SAFE (Simple Agreement for Future Equity) is a legal contract between a start-up and an investor that allows the investor to purchase equity in the company at a future date (typically during your company’s next priced round or during a liquidity event)
As pointed out earlier, there are important terms in SAFE Agreements that you must understand.
We would proceed to understand them in the subsequent subheading below.
Important Terminologies You Should Know
The terminologies in SAFE Agreement that we’ll consider in this post include valuation, discounts, valuation caps, pre-money or post-money, pro-rata rights, and the most favoured nations provision.
Valuation:
A valuation is the process of determining how much a company is worth. By setting the share price of a Company the value of the company can be deduced.
In many cases, valuation is done by Institutional Venture Capital fund.
Valuation Cap:
A valuation cap is a technique that establishes the highest price at which the investment can be converted into equity. It establishes the maximum price the investor will pay for preferred shares in a subsequent equity round.
It’s a way to reward early investors by ensuring that they won’t lose out if the company’s expected value rises over the previously agreed-upon estimate.
Priced round:
A priced round is an equity-based investment procedure where newly minted stock in a company is offered and sold at a predetermined share per price.
In SAFEs, Priced Rounds are crucial since conversion typically occurs after the subsequent Priced round.
Discount:
A discount is a percentage taken off the price per share of the stock sold in the following round. Investors in SAFE arrangements receive discounts as benefits.
Most Favoured Nation Clause:
This is a clause in the SAFE, commonly known as the “MFN Clause,” protects investors by granting them rights and benefits received by later (subsequent) investors, if those benefits are more advantageous than those initially agreed.
Conclusion
We believe that as SAFE grows more popular among Nigerian inventors and entrepreneurs, it’s critical that you learn certain key terms such as the ones presented in this post.
We would look at the key differences between SAFE agreements and convertible notes , and whether SAFE agreements amount to Debt or Equity in subsequent post.
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