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A Simple Agreement for Future Equity (SAFE) is a relatively new type of agreement that is commonly used by startups. With this agreement, investors can make a cash payment to small companies which sees them purchase shares when a pre-agreed event occurs.
This is an innovative and flexible agreement and provides all parties with adequate guarantees. Find out what you need to know about this document and how to find free SAFE templates you can customise to fit your needs.
What's in this guide?
- What is a simple agreement for future equity?
- When might I use a simple agreement for future equity?
- SAFE vs convertible note
- What does a simple agreement for future equity include and not include?
- How effective is this type of agreement?
- Do I need a lawyer for a simple agreement for future equity?
- Get access to simple agreement for future equity templates online
- How do I write a simple agreement for future equity?
- Where to get free simple agreement for future equity templates?
What is a simple agreement for future equity?
Also known as SAFE, the Simple Agreement for Future Equity is a form of convertible security designed for small businesses, such as startups, intending to raise capital.
It's a flexible agreement between an investor and a company, which locks in an investment when an event occurs – typically an equity raise.
Download this template at Lawpath
When might I use a simple agreement for future equity?
You should consider this type of agreement if:
- You're a small or new business (such as a startup), seeking an investment
- You're not looking for a loan or a quick way to generate revenue
- You're an investor and you are interested in gaining rights over the shares of a certain company when it reaches a specific stage.
SAFE vs convertible note
SAFEs generally require a quick and flexible negotiation. The business and the investor do not need to choose a deadline and the trigger event may never occur. The agreement is regulated under the Corporations Acts and does not generate any interest.
Convertible Notes may need a more complex negotiation to choose the term of the loan and its interest. The note has a maturity date, which is when the loan needs to be repaid or converted to equity at a predetermined rate.
What does a simple agreement for future equity include and not include?
- Detailed information about the company and the investor.
- The amount of money exchanged.
- Conversion terms, which are the specific terms by which the amount invested gets converted into equity.
- The trigger event, following which the investor will either get their money back or receive shares in the company.
- Repurchase rights, which allow the business to repurchase the right to equity if necessary.
- Dissolution rights stating what happens to the money if the company dissolves.
Typically not included
- The deadline for the money to be returned or converted into shares, as SAFEs never expire.
- Interest rates, which do not apply to this type of agreement.
- Information about the minimum amount of funds to be raised at the equity financing, since this is not included in this type of agreement.
How effective is this type of agreement?
SAFEs do not have any interest rate or maturity date. Most importantly, these agreements are very flexible. When the pre-agreed event occurs, the investor can either convert the amount into shares or receive their money back.
From the business point of view, it allows them to delay valuing their company. If there is insolvency before the trigger event, the cash automatically converts into shares and the company agrees to pay the investor before making any payments to its shareholders. This is what makes SAFE different from normal debt.
Do I need a lawyer for a simple agreement for future equity?
Before writing and signing a SAFE note, both the company and the investor should consider whether this is an appropriate agreement for their future success.
It is essential that all parties understand the chosen trigger events and how it will affect the cash payment. Although seeking the help of a lawyer is not mandatory, the advice of a professional can help to make the important call around whether a SAFE note or a loan is more appropriate for the circumstances.
Get access to simple agreement for future equity templates online
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How do I write a simple agreement for future equity?
The easiest way is to use a simple agreement for future equity template. When preparing your agreement, it is essential to choose a trigger event, which will translate into the cash payment being returned or converted into shares.
Whether you are the investor or the company, you must understand the criteria and implications of a SAFE, which are not the same as with your average loan. For this reason, it is important to write the agreement based on both parts' needs and circumstances.
Where to get free simple agreement for future equity templates?
- LawPath. The website provides a convertible form which can be customised with your details.
- Zegal. Although this form is not free, it has other perks like the ability to be downloaded in several different languages.
- The Australian Investment Council (AIC) offers a sample SAFE note template, which can be used to write your own agreement.
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