Issuing company shares in Hong Kong: step-by-step guide
At some point in your startup’s lifetime you’re likely to have to issue shares – especially if you’re raising fund...
Need a fast way to raise investment before a funding round? Our SeedSAFE simple agreements for future equity allow startups to take investment ahead of a funding round. They’re quick, easy and affordable to create, share and sign on SeedLegals.
In this post, we explain the key features of SeedSAFE and how to pick the right SeedSAFE agreement for you, decide on which terms you want to include, and make sure you’ve got all the knowledge you need to negotiate these terms with your investor.
SeedSAFE is a simple agreement for future equity. It allows you to do what we call ‘agile fundraising,’ which means you can raise investment when the opportunity (or need) arises and without doing a valuation until later. Usually when you do a funding round, you have to round up all your investors, agree a valuation with them, hire lawyers to create all the legal paperwork and wait for all the investors to agree and sign the documents. With SeedSAFE, you can wait until your next funding round to do the valuation, plus you only need one investor to sign the document for the amount they’re investing. It’s much simpler and faster.
Essentially, SeedSAFE gives you the option to choose between a YC SAFE and a SeedFAST when you create your simple agreement for future equity on SeedLegals.
So how are the YC SAFE and SeedFAST different? For those who want to see a comparison of the key terms at a glance, we’ve put together the table below. If you’re interested in a more in-depth look, please keep reading.
|YC SAFE||Enhanced SAFE||SeedFAST|
|Conversion event/trigger: the event that triggers the conversion of the investment into equity|
|Converts into equity when the startup raises the next funding round||Converts into equity when the startup raises the next funding round, unless longstop date is included||Converts into equity when the startup raises the next funding round or at the longstop date|
|Longstop date: the date at which the investment converts into shares if no funding round has occurred by then|
|No longstop date mechanism||Option to include a longstop date||Option to include a longstop date|
|Valuation: the agreed valuation upon which the investment converts to shares|
|Assumes variable valuation that is determined at the next funding round||Option to specify a fixed valuation||Option to specify a fixed valuation|
|Valuation cap: the maximum price per share at which the investment will convert, regardless of the actual valuation at the next funding round|
|Valuation cap included in the default “Valuation Cap, no Discount” SAFE. Calculated on a “post-money” basis (i.e., the cap includes all amounts raised by convertibles)||Option to include a valuation cap calculated on a “post-money” basis (i.e., the cap includes all amounts raised by convertibles)||Option to include valuation cap, which excludes all amounts raised by convertibles|
|Discount: a percentage off of the valuation of the company that investors are entitled to when their investment convert into equity, which gives them a larger number of shares per dollar invested|
|Discount included in the default “Discount, no Valuation Cap” SAFE||Option to include discount||Option to include discount|
|Specific conversion share classes: a specific class of shares that the investment will convert into on the funding round|
|Most favoured nation (“MFN”) concept included in the default “MFN, no Valuation Cap, no Discount” SAFE
The right for the investor to participate in the next funding round is separately contained in the “Pro Rata Side Letter” accompanying the SAFE
|Option to include additional investor rights, such as:
||Option to include additional investor rights, such as:
If you don’t fully understand the table above yet, no problem. Read below for a full explanation of each key feature.
The YC SAFE and SeedFAST are advanced subscription agreements (ASAs). ASAs allow investors to invest money now and convert their investment to shares at a later time (typically in the next funding round, otherwise at the longstop date).
Think of a longstop date as the latest date on which the investment has to be converted into shares. So if for some reason the next funding round doesn’t happen in the timeframe expected by the parties, conversion will happen at the longstop date. Without a longstop date, the investment will only convert to shares in the next funding round, regardless of how long away that might be.
The standard YC SAFE does not contain a longstop date. With SeedSAFE, you can choose whether you create a SeedFAST or a YC SAFE with or without a longstop date.
One of the key benefits of any ASA is that you can raise investment now but fix your valuation later when you do your funding round. But sometimes your investor might want their investment to convert at a specific valuation.
The option to include a specific valuation has always been available with SeedFAST. By design, the YC SAFE assumes a variable valuation but you now have the option to include a specific valuation if you’d like to.
A valuation cap is the limit on the price per share at which the investment converts, and sets the maximum valuation the investment will convert at. For example, if there’s a valuation cap of $20, the investment will still convert at $20 per share even if each company’s share is ultimately valued to be more expensive.
Valuation caps are standard for variable valuations in both the SeedFAST and the YC SAFE format. However, there is one key difference that should be understood before choosing which format to go with – and that’s the definition of “post-money”.
Y Combinator defines the YC SAFE as being “post-money”, but it can be a little confusing.
Normally the term “post-money” means the valuation after your funding round. For example, if you’re raising $500,000 on a $2 million pre-money valuation, then the post-money valuation (the valuation at the end of the round) is $2.5 million.
But when it comes to a YC SAFE, “post-money” means something a little different. In the context of a YC SAFE, “post-money” means a valuation that includes all amounts raised using convertible securities. In contrast, the SeedFAST excludes such amounts.
To understand the effect of this difference, it’s useful to first understand that both the YC SAFE and the SeedFAST calculate the number of conversion shares by dividing the investment by the price of a single share. And the price of a single share is determined by dividing the startup’s valuation or agreed valuation cap by the number of fully diluted shares.
Because the YC SAFE includes all convertible securities in its concept of “fully diluted” while the SeedFAST excludes them, the total number of fully diluted shares in a startup would tend to be higher when calculated under the YC SAFE versus the SeedFAST. The result is that the price per share under a YC SAFE would be lower than it would be under a SeedFAST.
For any given valuation cap, because of the lower price per share, you would end up issuing more shares under a YC SAFE than you would with the SeedFAST. So if you’re using the YC SAFE the valuation cap should be adjusted higher than if you were using the SeedFAST.
ASAs allow you to offer a discount on the valuation at which conversion takes place. Discounts can make it attractive for investors to invest ahead of your next funding round. A typical discount would be 10-20%, perhaps closer to 10% if the next round is a few months away or 20% if it’s six months away.
For example, if the next funding round fixes the company’s valuation at $1M, a 10% discount would mean that the SAFE converts at $900K. This means that the advanced investor gets more shares per dollar than the investors of that funding round.
You have the option to add a discount for the SeedSAFE in both the YC SAFE and SeedFAST format.
More useful features are now available with a YC SAFE format that have always been available on the SeedFAST.
With SeedSAFE, you have full control of the key terms and features you include in your agreement – whether you want to create a YC SAFE or a SeedFAST. If you have any questions, or still not sure on the best way to go, we’re here to help. Get in touch with our team who will guide you and help you get started.
*Disclaimer: The information contained in this article does not constitute and should not be treated as legal, tax, accounting, or financial advice.