What is a Safe Agreement and how does it Help Startups Raise Investments?

What is a Safe Agreement and how does it Help Startups Raise Investments?

what is safe agreement

Many of our clients at Danoy are new startup companies involved in innovative technology development. We assist these young companies in effectively establishing their financial departments and manage funds raised through investments or sales. This allows their CEOs and development teams to focus on what they do best, for instance product development or sales.

Often, these startup companies come to us after attracting the interest of potential investors. In such cases, their initial request from us is assistance in managing the fundraising process.

Ideally, fundraising is done through a Share Purchase Agreement (SPA), a detailed contract covering all aspects of the investment or company acquisition. This includes company valuation, the amount of shares and rights investors receive, stock dilution mechanisms, positions on the company’s board, ownership of intellectual property (IP), and more.

However, what if there are parameters in the deal that haven’t been solidified yet at this early stage of the company? For example, the company’s valuation might not yet be determined, or the infrastructure for fundraising needs to be relatively quickly prepared to mitigate the risk of investors retracting their interest if preparations are delayed.

Here comes into play another type of agreement called a Safe Agreement. The term “SAFE” stands for Simple Agreement for Future Equity.

How does a SAFE Agreement differ from SPA Agreement? In essence, a SAFE Agreement is designed to address key uncertainties in the early stages of a company, acknowledging that these will be resolved in due course while still paving the way for the investment. The most notable example is company valuation, which determines the equity received by investors. Many times, new startups cannot yet accurately assess their company’s value as they are still in early development stages.

A Safe Agreement can include guidelines for resolving additional issues that may arise later as the startup grows. For instance, a Validation Cap (maximum company valuation) that affects the equity given to investors, discounts on stock prices in future investment rounds, terms for additional investor inclusion, and more.

Another significant advantage of a SAFE Agreement over SPA Agreement is that it is shorter and quicker to draft. This means that if a startup encounters an investment opportunity within a relatively short timeframe, a SAFE Agreement can help finalize the transaction swiftly and securely.

At Danoy, we specialize in financial guidance for new startups, helping founders protect their interests and those of their company throughout the fundraising process. If your startup is preparing for fundraising, feel free to reach out to us.

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