Here`s a more in-depth look at SAFE agreements versus convertible bonds below: Companies and investors will now trade pro-rated rights on a transaction-by-transaction basis. Investors who write a bigger cheque will have more influence. In fact, this is already the case: although former SAFE holders were granted a pro-rated right, the right in the Series A investor rights agreement was often revoked for investors who did not meet the criteria of a "large investor". The new mechanism is more in line with market conditions. Then they say that this document is as it is on the website and you can`t change anything that wasn`t in parentheses. It doesn`t really make sense because I don`t see why there shouldn`t be a split between the cases of a discount and a discount and a cap. The safe was an easy and quick way to get the first money in the company, and the concept was that the owners of safes were only the first investors in this future price round. But early-stage fundraising evolved in the years following the introduction of the original vault, and now startups are raising much larger sums of money than the first round of "seed" funding. While safes are used for these start-up rounds, these rounds are really best seen as completely separate financing, rather than "bridges" to subsequent price rounds. The former SAFE granted SAFE holders a pro-rated right to protect their property. The new SAFE does not.

Instead, the company and the investor can conclude a cover letter that grants the investor the proportionate right. To simplify things, YC has published a standard cover letter on its website. Let`s say you invest $25,000 under a SAFE deal. Since assigning a valuation to early-stage companies makes almost no sense, the startup will use its SAFE agreement to find new investors to postpone the valuation to a future event. Investors simply buy the right to equity in the future if the startup has more traction and performance data that would allow an institutional investor to properly evaluate the startup. At that time, your $25,000 would be converted into shares relative to the valuation of the rated round. Early investors typically benefit from risk that includes discounts and valuation caps. Note that this sounds like an oversight "of this particular simple deal for futures stocks with a `post-monetary valuation cap.` You will need to hire a lawyer to change this if you make a note with a discount or a discount and a cap. The SAFE guide is only written with a cap, so I guess they have a bias towards capped documents only.

I guess they don`t want to create a template for every document. 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. Even if the safe is not suitable for all financing situations, the conditions must be balanced, taking into account the interests of the startup and investors. As with the original safe, there are still trade-offs between simplicity and completeness, so while not all on-board cases are covered, we believe the vault covers the most relevant and common issues. Both parties are encouraged to ask their lawyers to check the vault if they wish, but we believe it provides a starting point that can be used in most situations without changes. We hold on to this belief because we`ve seen hundreds of companies first-hand each year and helped them raise funds, as well as the thoughtful feedback we`ve received from founders, investors, lawyers, and accountants with whom we`ve shared the first drafts of the post-money vault. Once the business grows, it is likely to raise additional capital and subsequently increase its value.

It is this result that investors are trying to achieve. The SAFE deal will be converted into shares of the company when new investors hold price rounds in the future. Our updated safes are therefore "post-money" safes. By "post-money" we mean that the possession of the safe holder is measured after (post) all the safe money has been settled – which is now a separate round – but always before (before) the new money in the price round that converts and dilutes the safes (usually the A series, but sometimes the seeds in series). In our opinion, the post-money safe has a great advantage for founders and investors - the ability to immediately and accurately calculate the amount of ownership of the company that has been sold. It`s crucial for founders to understand how much dilution is caused by each vault they sell, just as it`s fair for investors to know how much of the company`s property they bought. Under the new agreement, investors will automatically receive the highest amount of their investment or the proceeds of the acquisition as if they had been converted into a joint venture. It is the flesh of the document. Pro-rata rights mean that an investor can retain their stake. If they buy 10% (but the calculation works in the end), then in this round of financing, if they are diluted by the Series A investor and the new ESOP push, they can invest more money and keep the entire property diluted to 10%.

Pro-rata rights allow investors to add more funds to maintain ownership rights as a percentage after equity financing rounds. The investor pays the new price compared to the initial price. These rights are a great way to keep strong investors motivated to advance their investment over the long term. 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. It`s a challenge to evaluate a startup at the beginning of its creation.

SAFE agreements solve this problem. They allow you to postpone the valuation to a future date and at the same time have the opportunity to invest or raise capital. A SAFE pro rata rights agreement is a letter by which a company grants proportionate rights to a SAFE investor. SAFE agreements, also known as simple agreements for future shares and SAFE notes, are legal contracts that startups use to raise seed capital and be similar to a warrant. They are an alternative to convertible bonds and KISS notes and were introduced by Y Combinator in 2013. The terms of safe agreements determine the relationship between the startup and the investor in terms of participation rights to trigger liquidity events. 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 buy shares in the funding round after the round in which the SAFE was converted (e.B. if the SAFE was converted in the Serie A round, pro-rated fees are entered into the next round of financing (e.B. Series B)). From the investor`s perspective, assuming the company`s valuation continues to increase with each additional round of funding, access to its pro-rated rights in the Series A round will always be preferred to a subsequent round of funding. .