Safe Agreement Valuation Cap

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    The best that can be said of using a SAFE is that it can facilitate the fundraising process at an early stage. This requires the provision of a uniform standardized form, widely accepted and therefore not useful, with the exception of a very limited set of variable operating conditions. This uniformity makes it possible to negotiate and install the SAFE fairly quickly and relatively easily. It may also prevent the need for additional documents, such as a shareholders` pact, or other shareholder-related administrative overheads. Particularly important for bridge financing, this simplified process can drastically reduce the time and cost of financing and leave more money in the startup`s pocket at the end of the day. If I invest $20,000 through a safe, the company will use that money to set up the business. But 20K doesn`t go that far. As soon as they progress, they may want to find more money. Suppose they find an investor who wants to buy 20% of the business for $2 million.

    If 20% of the business is worth $2 million after investing, that means the valuation after the money is $10 million. In fairness, the investor should have some comfort only if an investment is made, if the business has very little value, that the rating does not turn into an astronomical valuation and thus deprives the investor of participation in all the benefits that have been made possible by the early investment. Cape Illustration: Let`s look at a situation where a start-up sold $100,000 of convertible bonds without discounts, 8% interest and a ceiling of $5 million, automatically converted with qualified financing of at least $1 million. Six months after the debt issue, the start-up sold $2 million in Stock Seed Preferred with a pre-money valuation of $8 million. A “valuation cap” allows bondholders to convert the stock to shares at the lower value of (i) the valuation ceiling or (ii) the price per share in a qualified financing (or, if there is a discount in the note, the discounted share price). This is not an assessment of the entity based on the entity`s current forecasts or assets. The objective is to ensure that an investor does not lose a significant appreciation of a business between the date of the sale of convertible bonds and the qualified financing. The company is negotiating with investors to sell a Series A preferred share valued at $1,000,000 for an valuation of $US 10,000.

    The company`s capital outstanding, fully diluted, just before financing, including a pool of options of 1,000,000 shares to be adopted in connection with financing, is 11,000,000 shares. As an example of a valuation ceiling used for conversion, we assume that we have a SAFE investment of $500,000, with a ceiling of 5,000,000 DOLLARS. In the event of a conversion, the SAFE investor receives shares of the same value as the investor (investor) whose investment is the source of the conversion), the valuation ceiling being a security barrier to prevent the SAFE investor from switching to that price. The valuation heading is currently based on the pre-money value of equity financing, which means that if the equity financing has a pre-monetary valuation of $2,000,000, the SAFE investor`s investment is included in that amount, which, in our example, means that the SAFE investor holds 25% of the issued and outstanding shares just before the closing of the investment. The company will issue and sell 1,100,110 Series Preferred shares at $0.909 per share to new investors. The company will issue and sell 220,022 Series A-1 shares at $0.4545 per share to the safe bearer.