When a startup is just getting started, it might be difficult to value it. This issue is resolved via SAFE agreements. They give you the option to postpone appraisal to a later time while continuing to invest or raise money.
As the business expands, it will probably generate more money, which will raise its worth. Investors are attempting to attain this outcome. When future pricing rounds involve new investors, the SAFE agreement is converted into business shares.
A simple step by step on how SAFE agreements work:
1. The Startup and the Investor have a contract in place.
2. The investment amount, discounts, trigger event, and valuation cap are the main points of discussion when negotiating the parameters of the agreement.
3. The funds is sent to the Start-up after the agreement and document’s execution,with the money being used in accordance with the contract’s pertinent provisions.
4. Before the event mentioned in the SAFE agreement causes the conversion, the investor does not receive the equity (Preferred stock).
5. Finally, when the terms are in place and the trigger event takes place, the Investor will acquire Preferred Stock in the Startup.
References
1. Y Accelerator Startup school – Kristy Nathoos (Author)
