In recent years, particularly in the start-up sector, new forms of financing have been increasingly established. One of the most prominent among these is the Simple Agreement for Future Equity (“SAFE”), which originates from the USA.
This blog post provides an initial overview of this relatively new form of financing and highlights its advantages.
1. What is a SAFE?
The fundamental idea behind a SAFE is to create a simple and quick means of financing start-ups. The investor provides an investment amount upon the conclusion of the SAFE and receives a legal claim that this investment amount will later convert into an equity stake in the company. This “conversion” occurs upon the occurrence of a predefined event (“Trigger Event”), such as the first equity financing round.
However, this simple US concept requires adjustments to comply with Liechtenstein law, in particular in relation to corporate law.
In Liechtenstein, generally the shareholders are responsible for carrying out a capital increase. Therefore, from the investors’ perspective, it must be ensured that the “conversion” is actually executed. This can be assured by way of a shareholders’ agreement or by having the company’s highest governing body create authorized capital, enabling the management to carry out the capital increase independently.
A SAFE under Liechtenstein law may be structured to grant the investor a contractual right to participate in a future capital increase to acquire an equity stake in the company. Alternatively, a SAFE can be structured as a type of convertible loan, which typically does not provide the investor with a repayment claim on the invested amount.
2. What are the advantages of a SAFE?
Compared to traditional financing instruments, a SAFE offers start-ups the following main advantages:
- No interest rate: Unlike other financing instruments, such as a convertible loan, the start-up does not have to pay interest to investors.
- No repayment obligation: The start-up has no repayment obligations concerning the invested capital.
- Standardization: Through the standardization of a SAFE, it can be used in the same form for multiple investors, saving time and costs in negotiating these contracts with investors.
- Deferral of valuation: At the signing date of the SAFE, only the valuation method needs to be determined, not the specific valuation of the start-up. Since the actual valuation occurs upon the occurrence of the “Trigger Event,” this saves time at the conclusion of the SAFE, allowing the start-up to receive the investment amount more quickly.
- Better terms for early stage investors: Investors can secure better terms at the signing of the SAFE through a favorable valuation method compared to later investors.
- Time for negotiating the shareholders’ agreement: By concluding the SAFE and the postponed admission of the investor as a shareholder, the start-up and the investors gain time to negotiate and finalize a legally secure shareholders’ agreement.
3. Conclusion
A SAFE (Simple Agreement for Future Equity) offers start-ups a simple and quick financing option. Through standardization and deferral of the company valuation, a SAFE saves time and costs, making it a viable alternative to other common financing methods for companies.
We are pleased to advise you, as a start-up or investor, on selecting the optimal SAFE structure, its creation, negotiation, and implementation.
Get started with us right now and contact us at office@isp.law or use our fully automated booking tool to make an appointment directly for an initial consultation at www.isp.law/termin-buchen/. We support you in the successful financing of your company.
