A SAFE is a cash investment in exchange for a contract that gives the investor the right to convert the investment into future shares. A SAFE is not a loan: there is no interest rate, no payments and no due date. A SAFE is not capital: it is not ordinary or preferred shares and does not give voting rights or other equity rights under state laws. The investor invests money and the company signs a three- to five-page SAFE contract that gives it certain rights. Another difference between Pre- and Post-Money-SAFE is the introduction of the cover letter pro rata by Y Combinator. The idea of a pro-rated right to participate in future funding rounds is not new. The pre-monetary SAFE includes a pro-rated integrated right, but it has often confused investors and companies, as it granted the right to purchase shares in the financing round after the financing round into which the SAFE was converted (e.B. if the SAFE was converted into the Series A round, pro-rated entitlements occurred in the next round of funding (e.B. Series B)). From the investor`s perspective, assuming that the company`s valuation continues to increase with each additional round of funding, access to its pro-rated rights in Series A will always be preferred to a subsequent round of funding.

Not surprisingly, this right has often been abused and applied to the round in which the SAFE itself was actually converted (i.e. Serie A). Another disadvantage of including pro-rata rights in the SAFE itself is that pro-rated rights may not be suitable for all investors and should be considered on a case-by-case basis. Finally, standard Series A financing documents contain pro-rated rights, and it is preferable for all investors to be bound by these forms rather than having investors with separate pro-rata rights that will continue after Series A. The optional pro-rata cover letter was introduced to address this confusion and lack of flexibility by: 1) clarifying that the pro-rata entitlement applies to the round table in which the SAFE converts and then falls, and 2) that the subsidiary letter may be granted on a case-by-case basis (e.B. only for investors who meet a minimum investment threshold). For more information on pro rata rights, we recommend “Why Superproratist Rights Are a Good Deal for Entrepreneurs” by Mark Suster; “Super Pro Rata Rights Aren`t Super” by David Beisel, co-founder and partner of NextView; and entrepreneur and angel investor Dave Lerner`s “Tis the Season for. Pro rata fees? The risk and tolerance of SAFE arrangements contrasts with those of convertible bonds. Investors may not be familiar with convertible bonds or may feel uncertain about the tax implications of the SAFE agreement. The standard for simple and flexible investment instruments are convertible bonds.

SAFE holders are now explicitly granted a number of rights similar to those of shareholders, including the right to receive dividends (ICO is anyone going?) and the right to receive the same remuneration opportunities as shareholders in the event of a liquidity event. In addition, the new SAFE introduces a new section, 1(d), detailing liquidation preferences following an acquisition with SAFERs in the same way as preferred shares. Rights under a SAFE pro rata rights agreement may only be exercised after the SAFE has been converted into preferred shares of the Company in a share financing. Then there`s the due diligence process, where a VC conducts an audit of your business to determine whether you can safely invest or acquire. Even after all this, the decisions you have to make and the processes you have to execute won`t be easier as you get closer to your goal of increasing Series A funding. The relative speed of SAFE agreements allows them to act as a standardized arrangement. In short, they are structured more similarly from one investment to another. Convertible bonds, on the other hand, come in many forms, which increase the flexibility of investment. The SAFE is essentially an agreement to issue shares to the investor in the future based on the company`s valuation at the time the SAFE is converted into shares. The evaluation limit serves as the evaluation ceiling, which is used only to calculate the SAFE conversion price. For example, if the company`s valuation in the next round of financing is $10 million and the previously issued SAFE has a valuation cap of $5 million, SAFE holders will buy at the $5 million cap, regardless of new investors who buy at a valuation of $10 million.

In some quarters, SAFE arrangements are superior to convertible bonds simply because they are not debts. Therefore, investors don`t have to worry about interest rates and maturity dates. Convertible bonds, on the other hand, contain both elements. But what does a startup gain by offering pro-rated rights? Security? Maybe. If the startup isn`t sure of its growth potential, it could be a smart maneuver to make sure the original investors stay with them. However, if the startup is clearly doing very well and it looks like it will have no trouble finding new investors for the next rounds, why offer pro-rated rights for early contributors? Prorated fees can mean the difference between thousands and millions of dollars for an investment, which is why they are so important to investors. The way for an early investor to prevent this is to include a provision that gives them pro-rated rights. This will allow them to keep the percentage of their stake unchanged and retain their voting rights even when issuing new shares. Another feature is the “pro-rated cover letter”. This gives the SAFE investor the right to make an additional investment in future towers. It`s good for the investor. But from a company`s perspective, pro-rated rights can sometimes be a problem if future investors want to have the future for themselves.

This potential problem can be exacerbated if the company has granted pro-rated rights to several SAFE investors. Being able to maintain stakes in startups that are undeniably successful is how venture capitalists make money. Pro-rata rights exist as a reward for early investors who were willing to support the startup in the riskiest investment phase. That`s why it`s important for these early investors to avoid diluting their shares once the startup is on a positive growth trajectory and wants to raise another round of funding. Prorata means “in proportion” in Latin. Most people are familiar with the concept of “pro-valuation” of landlord relations: when you sign a lease in the middle of the month, your rent can be “prorated,” paying an amount of rent proportional to your time that actually occupies the property. Another rather complex concept that arises around the corner in these last stages is the question of proportional rights. If you`ve already started a round, chances are your early investors will also want to participate in subsequent rounds.

A pro-rated right is a right granted to an investor that allows them to retain their initial share of ownership in subsequent funding rounds. Some founders include an important investor clause in the term sheet that reserves certain rights and privileges to those they consider “major investors.” Whether all investors are granted pro-rata rights or only those who exceed a significant investor threshold is a delicate decision for two reasons. Definition Pro-rated rights (or pro-rated fees) in a condition sheet or cover letter guarantee an investor the opportunity to invest an amount in subsequent rounds of financing that retains its stake. Pre-money, or post-money, refers to valuation metrics that help investors and founders understand the value of a business. This is one of the most important terms of a SAFE agreement. Pre-money means that the valuation is ahead of the money of new investors. Post-money means that the valuation includes the capital raised in this round. Ultimately, founders and investors want to do what`s best for the company. Whether or not offering pro-rated rights is best for the company depends on an almost unlimited number of factors, some of which might even be beyond your control. Under the new SAFE agreement after the amount of money, the company will issue 40% of the total new equity, which corresponds to 66.66 new shares [66.66 / 166.66 = 40%].

Each investor receives 33.33 new shares and ends up with 20%. The founders will eventually receive 100 of the 166.66 shares, or 60%. Prorated fees can be calculated as a percentage, dollar to dollar or fixed value. Under the old SAFE before money agreement, the first SAFE receives 20% of the new capital or 25 new shares [25 new shares out of a total of 125 shares are 20%]. The second SAFE receives 20% of the new capital or 25 new shares. But investors will dilute every drop: they end up with 25 out of 150 stocks, or 16.67%. The founders will end up with the remaining 100 shares out of 150, or 66.67%. If a company grants superprorata rights to a venture capital firm and decides not to invest beyond its percentage base, even if it has the right to do so, other companies may believe that there is a reason why the insider investor does not believe in the company, which may deter the new investor. As we mentioned earlier, investors have the right to assert their rights on a pro rata basis, but this is not mandatory. Obviously, they will want to assert their rights when it is obvious that the startup is doing very well and success is imminent. In most typical scenarios, early investors are granted pro-rated rights.

As mentioned above, even if they are granted pro-rated rights, they are not required to invest in subsequent rounds to hold their share of capital. But in the event of a disagreement where the investor with pro-rata rights refuses to surrender them, he will usually win any possible legal dispute that might result, since pro-rata rights are in fact legally binding. This is the flesh of the document. .