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Incorporation

Key Considerations When Deciding Where To Incorporate

How To Incorporate a Delaware C Corp Through Clerky?

Form Of SOSV Program Investments

How are SOSV Program Investments Made?

What Is A SAFE?

What Does Post-Money Mean?

How Does a Post-Money Fixed Percentage SAFE Convert to Equity?

Structure of the SOSV Program Investment

Structure of the SOSV Program Investment

Cash SAFE

Program SAFE

Additional Cash SAFE

Cash SAFE

Cash Amount

Conversion – Valuation Cap Or Discount?

What Events Trigger Conversion of Investment to Equity?

What is an Equity Financing?

What Calculation is Used to Determine the Number of Shares Issuable to the Investor Upon Conversion of the Cash SAFE?

The number of Equity Securities that the Cash SAFE can convert into will depend on the share price of the next round and two key elements – the Discount Rate and the Valuation Cap. Both of these clauses aim to give the Investor the benefit of being one of the first Investors supporting the Company i.e. a maximum price per share that will be paid by the Investor (the “Valuation Cap”) or a discount on the price per share the next investor pays in an Equity Financing (the “Discount Rate”). Without the Discount Rate or the Valuation Cap, the SAFE would essentially convert into the Equity Securities at the same price as the equity issued in the Equity Financing, giving no incentive or benefit to the early stage Investor. The Discount Rate and the Valuation Cap aim to remedy this for the benefit of the early Investor.

The Discount Rate

The discount rate acknowledges that the SAFE holder has taken on additional risk in investing at such an early stage in the startup. The SAFE holder gets a level of protection on the basis that the SAFE holder will have the entitlement to a discount against the future stated value of the Company at the time of conversion. The Discount Rate in the Cash SAFE is typically  80%. For example, if a subsequent investor in an Equity Financing pays $1.00 per share where the Discount Rate in the Cash SAFE is 80%, SOSV (as the SAFE holder) would convert at $0.80 per share.

The Valuation Cap

The valuation cap in the SAFE (the “Valuation Cap”) again aims to acknowledge the risk taken by the early stage SAFE holder as an investor in the Company. The Valuation Cap sets the MAXIMUM price into which the SAFE will convert to equity in the startup – essentially protecting the SAFE holder by setting a limit on the conversion price of the SAFE so that the SAFE holder is guaranteed a minimum number of Equity Securities if the subsequent priced equity round is at a valuation above the Valuation Cap.

If the next round (i.e. the “Equity Financing”) is at a valuation level below the Valuation Cap, then the calculation may not be relevant. Remember, the Valuation Cap is the maximum price that the SAFE can convert. If the SAFE converts at the Valuation Cap this is generally a good sign, as the actual valuation of the Company at the time of conversion is probably greater than the Valuation Cap.

The SAFE will convert at either the Discount Rate or the Valuation Cap, whichever results in the best (i.e. lowest) price for the Investor, ensuring the Investor get the greatest number of Preferred Shares.

What is an Optional Conversion?

What is a Liquidity Event?

What is a Dissolution Event?

What is a Review Conversion

What is a Pro Rata Right?

What is a Most Favored Nations Clause?

What Is an Employee Share Option Plan (ESOP) or Unissued Option Pool?

Can the Cash SAFE be Assigned?

Program SAFE

Program Amount

Conversion to a Fixed Percentage

What Events Trigger Conversion of Investment to Equity?

What is an Equity Financing?

What Calculation Is Used to Determine the Number of Shares Issuable to the Investor Upon Conversion of the Program SAFE?

What is an Optional Conversion?

What is a Dissolution Event?

What is a Liquidity Event?

What is a Review Conversion?

What is a Pro Rata Right?

What is an Employee Share Option Plan (ESOP) or Unissued Option Pool?

What Representations and Warranties are Given with Respect to the Company’s Intellectual Property?

What are SOSV’s Vesting Requirements?

What is a Most Favored Nations Clause?

What is a Put Right?

What is an Observer Right?

What are Information Rights?

What is the Major Investor Designation Clause?

What is a Pre Conversion Pro Rata Right?

What is a First Financing Right?

What is the Investor Consent Matters Clause?

What are the Program Participation Requirements?

What Happens if a Participant is Removed From the Program?

What Does the Exit Endeavour Clause Mean?

Can the Program SAFE be Assigned?

Optional Additional Cash SAFE

What is an Additional Cash SAFE?