By adding convertible documents to the definition of post-money company capitalization, the denominator becomes larger in this simple problem of division. And with a higher denominator, the lower the ratio, i.e. the price per share. With the low price per share, the SAFE investor receives more shares for his money. And the more shares they receive, the more ownership of other shareholders is diluted. To better explain, a SAFE is a convertible loan that allows investors to acquire shares in a future price cycle. It addresses many of the challenges and disadvantages of convertible bonds. For this reason, it is a great fair option for founders and investors. This is also why many startups prefer SAFE notes because they are not interest rates and are not debts, unlike convertible bonds. But for all the positives of SAFEs, there is also uncertainty.
Under a Simple Agreement for Future Equity (SAFE), the investment is converted into equity when there is a “equity financing,” a “liquidity event” or “a dissolution event.” SAFE agreements are a relatively new type of investment created by Y Combinator in 2013. These agreements are concluded between a company and an investor and create potential future capital in the company for the investor in exchange for immediate money to the company. SAFE turns into equity in a subsequent funding cycle, but only if a specific trigger event (as described in the agreement) takes place. In 2013, startup accelerator Y Combinator (a Silicon Valley accelerator) introduced an instrument known as a Simple Future Capital Agreement (SAFE). It was created as a simpler alternative to traditional convertible bonds. It allows startups to easily structure their upfront capital assets, with no maturities or interest rates. Another new function of the safe concerns a “prorgula” right. The original safe required the company to allow holders of safes to participate in the financing round after the financing round in which the safe was converted (for example. B if the safe is converted into series group preferred actuators, a secure holder – now holder of a Series A preferred share subseries – is allowed to acquire a proportionate portion of the Series B preferred share). While this concept is consistent with the original concept of safe, it made no sense in a world where safes were becoming independent funding cycles. Thus, the “old” pro-rata right is removed from the new safe, but we have a new model letter (optional) that offers the investor a proportional right in the preferential financing of Series A on the basis of the converted safe property of the investor, which is now much more transparent.