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Simple Agreement for Future Equity v. Convertible Notes: Pros and Cons

Posted by Mohsen Parsa | Dec 15, 2021 | 0 Comments

A convertible note is a company debt: a loan carrying an interest rate, which converts to equity (stock ownership) upon the occurrence of a previously decided event such as the successful closing of a future investment round, or reaching a maturity date. A SAFE, in contrast, is neither debt nor equity and places no immediate financial burden on company founders. It is a fairly basic agreement between a company and an investor that gives the investor the right to purchase stock down the road at a lower rate than subsequent investors.

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What Purpose Does “Valuation Discount” Serve in a Simple Agreement for Future Equity?

Posted by Mohsen Parsa | Dec 01, 2021 | 0 Comments

Valuation discounts serve as a lure to make a speculative investment more attractive to potential investors during the startup’s earliest phase. Since investing in a startup is a high-risk proposition, the typical investor is looking for a high return.  The discount helps ensure the high return by giving early funders a preferential investment position, allowing their investment dollars to go further in subsequent financing rounds than the same amount of dollars from investors who previously held off on investing.

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What Purpose Does “Valuation Cap” Serve In A Simple Agreement For Future Equity?

Posted by Mohsen Parsa | Nov 15, 2021 | 0 Comments

Valuation cap is a ceiling imposed on the price at which a SAFE will convert to stock ownership in the future. It is the maximum valuation at which an investor can convert a SAFE into equity: a pre-negotiated amount that serves to “cap” the conversion price once shares are issued. If the company raises money above the cap, the investor can invest at a price equivalent to the share cap. When the shares are issued, the investor will receive the equivalent number of shares as if they had invested more money.

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