WISE vs SAFE
Recently, I came across the “Swedish SAFE”, called WISE Convertible (Warrants for Investment in Startup Equity). It is simply the SAFE alternative under Swedish corporate law.
As you may imagine not every contract is directly usable in all countries in the exact same way and adjustments are needed. The resulting contract should be very similar if not almost the same in essence.
So I will walk you through the differences. Though, remember I am not a lawyer. This post is for general information only. If you are going to act on SAFE or WISE convertible, either be a lawyer or hire a lawyer.
Main Difference
Basically WISE is a special type of warrant. A warrant is almost the same as an option (see the end of this post for detailed explanation). According to the author they choose warrants over convertibles because
- Warrants are well known and widely used in Swedish businesses, therefore corporate law and taxation rules are more clear
- Convertible is actually a type of debt. Debt over a certain threshold of the company’s capital might be problematic, especially troublesome for the company directors.
Also bear in mind that the warrant premium is not a debt as in convertible type instruments. Though, in the premises of early startup investment context it makes little to no difference unless it is an exceptional case.
Other rules of the WISE can be considered as a mapping of SAFEs in the context of the warrant and the Swedish corporate law. See the details at the source.
Significance
Good news is it seems compliant with the law and tax efficient (again, I am not a lawyer, neither a tax consultant). Having such a document out in the open reduces overhead and costs for startups which is actually essential at the beginning.
Startups/investors in other countries might need to make adjustments to SAFE in order to avoid potential unsavory consequences. I hope they also make their agreements open.
Bonus: Option
An option, as the name suggests, the right (option) but not the necessity to buy/sell something at a predetermined price (strike price) at a predetermined time (maturity). In exchange the owner of the option pays the issuer a premium (option price).
For instance, I enter an option agreement with a counterparty dictating that ‘I “might” buy 100 AAPL shares at USD 225 per share (strike price) on Nov 30, 2024’, I pay 4 dollars per share as premium. Current price of AAPL is around 216, so it only makes sense for me to buy the shares on Nov 30 if share price increases above 225 (otherwise market will be cheaper). Thanks to the conditions of the option I might choose not to. (For the advanced reader, this is a vanilla or European Call option.)
Options can be designed in many settings with many rules (called “exotics”). Some of them are named such as American, Bermudan, Asian, Barrier etc. The essence is having the right but not the obligation in exchange for a premium. Warrants are issued by companies themselves, so WISE here can be called an exotic warrant.