All too often, I am witness to painful valuation discussions
at pre-Series A stages which distract founders and can taint their relationship
with the early investors. In the right circumstances, SAFEs provide a useful
alternative.
SAFEs are simple equity subscription commitments which are
used instead of conventional seed equity issues or convertible loan notes. They
are a helpful tool in that, unlike convertible loan notes (which commonly carry
an interest rate and a redemption mechanism for the period that the notes remain
unconverted), they are contracts for pure equity. The key benefit over a share
issue though, is that the valuation need not be fixed at the time the SAFE is
put in place; rather it is commuted into the next funding round when the equity
committed by the SAFE is actually issued, potentially with a discount or cap on
valuation attached. SAFEs contain basic reps and warranties, and provide for
the SAFE holder to get customary investor protection in proportion to that
offered to future investors. As a result, SAFEs tend to be much quicker to
negotiate and close than the alternatives.
In the UK, while we have seen a number of SAFE proposals in recent
months, they have not quite entered the mainstream. We do have something similar,
in that the practice has developed for SEIS/EIS investors who need to provide ad
hoc financing to companies to enter into “advance subscription” commitments
with companies. These advance subscriptions developed as a practice owing to
the restrictions in the SEIS/EIS legislation on use of convertible loans. So
effectively, the advance subscriptions are irrevocable commitments for future
equity. They are not always simple (compared to a SAFE agreement which can be
just 5-6 pages long) but they operate in a similar way.
So, as the funding environment remains strong in the UK, I
predict that we will see more and more of the hottest early stage companies
deferring difficult valuation discussions during seed stages, and instead doing
SAFE financings, which can be structured in such a way as to take advantages of
the sought after SEIS and EIS tax reliefs.
Investors who may be tempted to agree to a SAFE will need to get comfortable that the Company is in good shape, and that matters like founder vesting/ leaver provisions and other basic protections have been provided for by the Company. While the funding climate is strong at present, a five page SAFE will rarely by itself give enough comfort to first time investors. Either (i) the SAFE needs to be put in place alongside a customary governance regime containing typical investor protections; or (ii) SAFEs will be used more as emergency or bridge financing where a conventional round has already taken place.
However, as long as the funding climate remains strong, we
will surely be seeing more of these.
No comments:
Post a Comment