SAFE - what it is and how it works

What does SAFE mean?

SAFE also secures the investment without the need to determine the value of the company at the time of investment. For a start-up, this type of contract is thus very advantageous precisely because of the absence of the debt element (and the associated interest) and without the need to value the company. It is also simpler (and cheaper) to prepare than a CLA.

Valuation cap and Discount

When using a SAFE, a valuation cap and discount are usually set out in the contract. The valuation cap determines the maximum price at which the investor will convert his investment into shares or equity in the start-up. The discount is usually a percentage discount that the investor receives on the price of the shares. For a better understanding, below are examples of how both instruments work.

Valuation cap

Let's imagine that Investor A invests CZK 1 million in a start-up using SAFE. A valuation cap of CZK 5 million is embedded in the contract.

Some time later, Investor B appears and also invests CZK 1 million in the start-up at a valuation of CZK 10 million.

Since a triggering event has occurred (acquisition of an equity stake by a third party - a new investor), Investor A is entitled to convert his investment into shares. Investor A has a contractually set valuation cap of CZK 5 million, compared to Investor B who makes the investment at a company value of CZK 10 million.

Thus, when Investor A converts, the company will be treated as if it were worth CZK 5 million, i.e. instead of 1 million shares/units, Investor A will receive 2 million shares/units.

Discount

Let us imagine the same situation as in the previous case. However, the contract with Investor A provides for a 20% discount, there is no valuation cap. Later, Investor B joins the company and agrees to buy the shares/shares at a price of CZK 1 per share/share, so the conversion trigger event of Investor A occurs again. However, Investor A will not have 1 share/share for CZK 1 as Investor B, but for CZK 0.80 thanks to the discount.

If it is the case that both the valuation cap and the discount appear in the SAFE, the more advantageous for the investor will usually be used.

Conclusion

It is quite clear that SAFE is an interesting form of financing for start-ups, which has its advantages and disadvantages compared to CLA. However, each agreement is individual and both the investor and the start-up should carefully consider which form of financing is most suitable for them.

If you are interested in SAFE or would like to learn more about investing in start-ups, please do not hesitate to contact us - we will be happy to help.