SAFE Agreement 101
Introduction
This article aims to provide a basic understanding of the SAFE agreement and how it differs from other agreements you may have signed.
What is a SAFE Agreement? Why should I care?
A SAFE Agreement is a simple way to raise money from investors. It’s a legal document that defines the terms and conditions of a startup’s fundraising, including how much equity you’ll give up in exchange for funding.
However, it should not be confused with an operating agreement (OA). An OA describes all aspects of your business — including who owns what percentage of the company and how profits will be distributed — but doesn’t have any impact on what happens if you go out of business or want to sell your company at some point in the future.
Difference between SAFE and Convertible notes
SAFE is a simple agreement for future equity, while convertible notes are a form of debt instrument. This means that SAFE does not require you to issue shares in exchange for the money you borrow from investors. In contrast, convertible notes do require an exchange of stock for debt (or vice versa).
While it may seem like these two instruments have more in common than they do different things: their legal status varies greatly depending on where they’re used and how they’re structured.
SAFE Notes vs. KISS (Keep It Simple Security) Notes
A SAFE is a simplified version of convertible notes. It can be used to raise capital for startups, but it’s not as flexible as equity crowdfunding.
The main difference between a SAFE and a KISS is that with the former you don’t get any voting rights in the company or share ownership (unless you’re an accredited investor). You also don’t have any option over how your shares are converted into common stock at their fair market value upon maturity, which means there’s no guarantee your investment will pay off at all! This makes it riskier than other forms of crowdfunding because if things go wrong, you’re out everything without any say in what happens next — even though this may still turn out okay overall!
However… if we look beyond these drawbacks then there are some great benefits too:
What Does the Term Valuation Cap Mean in the SAFE Mean?
The valuation cap is the upper limit of the valuation. It’s a very important number to be aware of because it can have a significant impact on how much money you’re able to raise for your company.
The reason for this is simple: if investors think that someone will buy your company at more than its current value, they’ll be willing to pay more for it. However, if investors think that someone will buy your company at less than its current value — they won’t be willing to pay as much for it either!
The Discount Rate or Conversion Price: How Much the Startup Will be Purchasing Shares for
The discount rate is the price at which the startup will purchase shares from investors. It’s calculated based on what investors are willing to pay for their investment, as well as how much they need to make a profit.
The discount rate can be thought of as an interest rate that will allow an investor to get paid back his or her money while still making some profit. For example, if you loaned 100 dollars and agreed to pay back half of it after three months, then there would be 100% interest charged on that loan — that would be your cost (or “interest”) per month; however if I had offered 5% annualized return instead of 7%, then my profit margin would increase significantly since I only had 25% down payment!
Discount price vs valuation cap
The discount price and valuation cap are two features that a startup can use to ensure that it gets the best deal for itself.
The discount price is the amount of money that you’re willing to pay for your company. It’s usually expressed as an annualized rate, which means it takes into account how much time has passed since the founding date of your company (in this case, when you first made an offer). You should know exactly how much everything costs before making an offer so that there aren’t any surprises or hidden fees later on down the line!
The valuation cap refers specifically to how much money every person involved in purchasing shares must put down before they can move forward — and again: this number represents only what each person pays; there isn’t anything stopping anyone else from coming along later and taking their place!
Most-Favored Nations (MFNs): Terms and Conditions
Most-Favored Nations (MFNs): Terms and Conditions
Most-Favored Nations are a provision that allows the investor to receive the same terms as any other investor. This can be used in many different situations, but most often it is included in SAFEs and convertible notes. For example, if an investor buys into a SAFE with an MFN clause, they are guaranteed that they will receive the same deal as any other person who has bought into the same security at that time. If two investors had purchased similar securities at different prices but without an MFN clause then one would likely be able to get a better deal than their counterpart because both would be treated equally under this provision.
MIR pro rata and transferability
MIR pro rata and transferability are terms that refer to the ability to sell SAFE notes to other investors.
If you purchased a note at a discount, then you have the right to sell your note at par (the market price) or more if you wish. If another investor buys your note, they must pay its original purchase price plus any accrued interest since it was issued.
However, if someone else sells their SAFE notes on an exchange like Binance or Bittrex before yours is sold by its issuer then there’s no need for them to do anything about it because their sale will automatically cancel out yours so long as both buyers are willing parties who understand how these things work together anyway!
Conclusion
With these tips, you are well on your way to negotiating a fair and just contract for both parties involved.
New to trading? Try crypto trading bots or copy trading
