If you’re a startup founder or investor in Ontario, you may have heard of a “SAFE agreement”. A SAFE agreement is a legal instrument used in early-stage startup financing rounds, particularly in the technology sector. SAFE stands for “Simple Agreement for Future Equity”, and it allows investors to provide funding to startups in exchange for the promise of future equity. In this article, we will discuss the details of a SAFE agreement and what it means for Ontario startups.
What is a SAFE agreement?
A SAFE agreement is a form of convertible security that provides a simplified and standardized method for early-stage startups to receive funding from investors. Unlike traditional equity investments, a SAFE agreement does not involve the sale of stock in the company at the time of investment. Instead, it creates a contractual right to receive equity in the future, typically upon the occurrence of a qualifying event, such as a subsequent financing round or an acquisition.
The terms of a SAFE agreement typically include a valuation cap and a discount rate. The valuation cap sets a maximum price at which the investor’s investment will convert into equity in the future, while the discount rate provides the investor with a discounted price relative to the valuation cap.
Why are SAFE agreements used?
SAFE agreements are often used in early-stage financing rounds where the valuation of the startup is uncertain or difficult to determine. Traditional equity investments require a valuation of the company at the time of investment, which can be challenging for early-stage startups that have not yet established a track record of revenue or profitability. A SAFE agreement provides a simplified mechanism for investors to invest in the company without the need for a valuation.
Additionally, SAFE agreements are relatively simple and quick to execute, making them an attractive option for both startups and investors. They allow for a streamlined fundraising process, which is particularly important for startups that are operating on limited resources.
What are the risks associated with SAFE agreements?
While SAFE agreements can be a useful tool for early-stage startups, they do come with some risks. One potential risk is the dilution of the founder’s equity. Since SAFE agreements typically involve the issuance of equity in the future, the founder’s ownership percentage will be diluted as more investors convert their investments into equity.
Another potential risk is the lack of investor protections. Unlike traditional equity investments, which come with certain shareholder rights and protections, such as the right to vote on important matters, SAFE agreements do not provide investors with these rights. This can make it difficult for investors to have a say in the direction of the company or to protect their investment.
How can an Ontario startup lawyer help with SAFE agreements?
An Ontario startup lawyer can help founders and investors navigate the complexities of SAFE agreements and ensure that their interests are protected. A lawyer can help draft and negotiate the terms of the agreement, including the valuation cap and discount rate, to ensure that both parties are getting a fair deal. Additionally, a lawyer can help ensure that the agreement complies with all applicable securities laws and regulations.
If you’re a founder or investor in an Ontario startup and are considering using a SAFE agreement for fundraising, it’s important to consult with an experienced startup lawyer. Contact Falcon Law PC at 1-877-892-7778 or info@falconlawyers.ca to schedule a consultation today. Our team of knowledgeable and experienced lawyers can provide guidance on all aspects of startup financing, including SAFE agreements.
