Safenotes pro2/9/2024 The first step in evaluating the SAFE notes to determine whether they are freestanding or embedded instruments. Accounting for SAFE notesĮvaluating whether the SAFE notes are freestanding or embedded Now that we have a brief overview of SAFE notes, the next question is how to account for them. While SAFE notes generally focus on equity rounds, there are usually terms included for a change of control or liquidity event, which allow for conversion into equity or cash at the holder’s option. When looking at a SAFE, also look at how the conversion terms work under different events. Generally, whichever feature results in the most shares being issued to the investor is the triggering feature. Note that in the circumstance in which the SAFE notes have a valuation cap, the value that will be received in the future (if there is an equity round) is unknown as the value of the company may come below, at, or above the valuation cap.īoth – some SAFE notes have both a discount and valuation cap. With a valuation of $1.00 per share, the investor has increased its stake in the company to $150,000. In this example, as the valuation cap is lower than the valuation, the shares would convert at a $20,000,000 valuation (i.e. When the SAFE note converts into preferred shares, it will convert based on the lower of the $30,000,000 valuation or the $20,000,000 valuation cap. The pre-money valuation of a company is $30,000,000 at $1.00 per share (i.e. The SAFE note does not have a discount, but it has a valuation cap of $20,000,000. For instance, let’s say that an investor purchases a $100,000 SAFE note and a Series A preferred round occurs at year later. Valuation cap – enables the investor to participate in future equity rounds based on a valuation cap. Note that in the circumstance in which the SAFE notes only have a discount, the value that will be received in the future (if there is an equity round) is already known by dividing the SAFE note value by the discount rate. At a valuation of $1.00 per share, the investor’s stake in the company is now worth $125,000. This results in 125,000 shares being issued. If Series A preferred shares are priced at $1.00 per share, the investor would be able to convert its SAFE into Series A preferred shares at $0.80 per share (80% – effectively a 20% discount). For instance, let’s say that an investor purchases a $100,000 SAFE and a Series A preferred round occurs a year later. No interest is required to be paid to the SAFE note holder by the Company.ĭiscount – enables the investor to participate in future equity rounds at a discount. No maturity date is specified within a SAFE note. SAFE notes can vary but generally operate the same way. In return, an investor receives the right to participate in future equity rounds. These notes enable a company to obtain funding without diluting their ownership percentage. Simple Agreements for Future Equity (SAFE) notes have gained popularity in recent years, especially with start-up companies.
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