{"id":18244,"date":"2020-11-09T00:54:03","date_gmt":"2020-11-09T00:54:03","guid":{"rendered":"https:\/\/seedlegals.com\/resources\/seedlegals-launches-uk-version-of-safe-for-companies-raising-from-us-investors\/"},"modified":"2020-11-09T00:54:03","modified_gmt":"2020-11-09T00:54:03","slug":"seedlegals-version-of-safe-for-companies-raising-from-us-investors","status":"publish","type":"post","link":"https:\/\/seedlegals.com\/ie\/resources\/seedlegals-version-of-safe-for-companies-raising-from-us-investors\/","title":{"rendered":"SeedLegals Irish version of YC SAFE for companies raising from US investors"},"content":{"rendered":"

Have a US investor looking for a SAFE? You can now do that on SeedLegals.<\/strong><\/p>\n

Important news for any UK company looking to raise investment from US investors, SeedLegals\u2019 hugely popular SeedFAST now has an option to match the deal terms expected by US investors looking for the deal terms in Y Combinator\u2019s Post Money SAFE.<\/p>\n

In this article I\u2019ll explain what that actually means, give a quick background to convertible notes and SAFEs, explain the pros and cons of YC\u2019s Post Money SAFE, and show you how to do your next US investment on SeedLegals with our UK version of a SAFE.<\/p>\n

Quick background on SAFEs and SeedFASTs<\/h3>\n

In a traditional funding round the founders round up a bunch of investors, agree a valuation with them, and then the investors get shares in the company proportional to their investments and the agreed valuation. If you\u2019ve managed to round up all the investors to fill out your round and managed to agree a valuation with them, brilliant.<\/p>\n

But, what if e.g. you wanted to raise \u00a3500K, but you have an investor who wants to invest \u00a350K now, and you could really do with that money now? It doesn\u2019t make sense to do a funding round just to raise \u00a350K, what if there was a way for the investor to give you the \u00a350K now, and you promise to give them shares when you do your next funding round, based on the valuation you agree with the new investors in that round?<\/p>\n

Historically the way to do that was using a Convertible Loan Note. But, as everyone who\u2019s been following the UK government\u2019s Future Fund initiative now knows, convertible notes aren’t compatible with the UK\u2019s popular SEIS and EIS tax benefits for angel investors because they offer interest and a return on capital. As a result, convertible notes aren\u2019t popular in early-stage UK funding rounds, where 80% of investment is SEIS\/EIS. The solution that emerged a few years ago is known as an Advanced Subscription Agreement (\u201cASA\u201d). At SeedLegals, we productised that and call it a SeedFAST. It\u2019s hugely popular, with thousands having been created since we launched it two years ago.<\/p>\n

Separately, in the US, Y Combinator were looking for a way to quickly and easily make multiple investments using standardised deal terms and without the insane US legal fees (SeedLegals isn\u2019t in the US yet\u2026). So they came up with a Simple Agreement for Future Equity (SAFE).<\/p>\n

Their SAFE become hugely popular too, and now most pre-Seed Round investments in the US are done by SAFE.<\/p>\n

The YC SAFE doesn\u2019t work in the UK<\/h3>\n

If you\u2019re a UK company raising money from a US investor, chances are high that they\u2019ll ask for a SAFE. At first glance it’s tempting to just download a free SAFE template agreement from the YC web site<\/a>, but you’ll quickly see that it won\u2019t work, for two key reasons:<\/p>\n

    \n
  1. It\u2019s US law, it needs adaption to English law (quick, can you commit that a \u201cChange of Control will qualify as a tax-free reorganization for U.S. federal income tax purposes<\/em>\u201d, where Change of Control is as per \u201cSection 13(d) and 14(d) of the Securities Exchange Act of 1934<\/em>\u201d?).<\/li>\n
  2. Its language, and the assumptions it makes about your future funding rounds, are designed for the US and just don\u2019t make sense in a UK context. Common Stock, Safe Preferred Stock, Standard Preferred Stock\u2026 just names, but they won\u2019t match things in your next round, and that could be problematic.<\/li>\n<\/ol>\n

    The good news is that since a SeedLegals SeedFAST is, at root, the same concept as a SAFE, when you have a US investor just get onto SeedLegals and create a SeedFAST for them, easy.<\/p>\n

    But wait\u2026 not so fast…<\/em><\/p>\n

    Introducing the Post Money SAFE<\/h3>\n

    The first version of Y Combinator\u2019s SAFE was similar in its key terms to a SeedFAST in that the SAFE converts as if it\u2019s just another investment in the next round, at the same valuation as the other investments in that round (excluding any discount or valuation cap that you gave your SAFE investor).<\/p>\n

    But, two years ago Y Combinator proposed a new version, known as a Post Money SAFE \u2013 you can read all about it here<\/a>.<\/p>\n

    In this new version, instead of the SAFE converting at the valuation of your next round (ignoring for now any discount or valuation cap that you may have offered to the investor), instead the SAFE converts at the next round valuation less the value of all SAFEs and other convertible instruments.<\/em><\/p>\n

    It\u2019s easiest to understand this visually:<\/p>\n

    \"\"<\/p>\n

    To see the difference, let\u2019s assume you\u2019re planning to raise a total of \u00a3500K in your next round, of which you\u2019ll raise \u00a3200K in advance subscriptions which will convert in your round, and \u00a3300K in new cash investment.<\/p>\n

    On the left you can see that if you did those advanced subscriptions with SeedFASTs, the investments would all convert at a \u00a32M valuation, and you and your existing shareholders would be diluted by<\/p>\n

    \u00a3500K \/ \u00a32.5M = 20%<\/p><\/blockquote>\n

    On the right, however, you can see that the Post Money SAFE converts at the valuation you agreed with the investors in your next round less the value of any existing advanced subscriptions<\/em>, so in this example that would be at a \u00a31.8M valuation.<\/p>\n

    This means you\u2019re now diluting by<\/p>\n

    \u00a3200K \/ \u00a32M = 10% for the SAFEs<\/p>\n

    \u00a3300K \/ \u00a32.3M = 13% for the new investments<\/p>\n

    for a total of 23% dilution<\/p><\/blockquote>\n

    So, what\u2019s the idea behind Post Money SAFEs?<\/h3>\n

    Y Combinator may have its own rationale for doing things this way, but here\u2019s one way of looking at it:<\/p>\n