A question we get asked on a regular basis is: where should I incorporate? An interesting question with lots of possible different answers and solutions. There are a number of considerations with regards to incorporation:

Fundraising

Where are your Investors?

Trading

Where is your product being manufactured & sold?

Grant availability

Is there non-dilutive funding available for locating in certain areas?

Residence

Where do you live or where do you want to live, and are there visa restrictions?

Each of these will have an impact on where you incorporate. US Investors do not generally invest into entities that are incorporated outside of the US (a Delaware C-Corp would be the standard investment entity used in the US). This is due to onerous tax filing and information requirements on US citizens for off-shore investment activity.

If you have been accepted to one of our upcoming Programs and would like to incorporate a Delaware C-Corporation using Clerky, please see our brief guide here.

SOSV Program investments are typically made in the form of Post Money SAFEs.

A SAFE (“Simple Agreement For Equity”) is an investment contract or agreement. In exchange for immediate investment, the Company agrees to give the Investor the right to an equity stake in the Company at a later date.

Unlike a loan agreement or convertible loan note, a SAFE is typically non repayable, is interest free, and does not have a maturity date. A SAFE can be structured as either a SAFE with a valuation cap, a SAFE with a discount, a SAFE with a valuation cap and a discount, a SAFE with MFN only, or a SAFE with a fixed percentage allocation of equity to the Investor.  SOSV Program Investments are typically structured using (i) a SAFE with a valuation cap and discount and (ii) a SAFE with a fixed percentage allocation.

“Post-money” refers to how and when the SAFE will convert to equity. The advantage of the post-money structure is that both the Company and the Investor know what percentage of equity the Investor will receive. Once the SAFE converts the Investor’s equity allocation will be locked-in on the post-money basis.

Usually, a post-money SAFE will convert to the locked-in percentage ownership immediately prior to the Company’s next equity financing, i.e., the SAFE will convert after all other outstanding instruments in the Company (loan notes, options, issued equity etc.), but before the new money investment in the equity financing.

Here’s an example of how a post-money fixed percentage SAFE converts to equity:

SOSV invests $275,000 into ABC Inc. on 1st of June 2024 using a post-money SAFE.

The SAFE provides that immediately prior to an “Equity Financing” (as defined in the SAFE and explained below in this FAQ) the $275,000 investment will convert to x% of the “Company Capitalisation”.

The definition of Company Capitalisation in a post-money SAFE usually looks something like this:

“Company Capitalization” is calculated immediately prior to the Equity Financing and (without double counting, in each case calculated on an as-converted to Common Stock basis):

• Includes all shares of Capital Stock issued and outstanding;
• Includes all Converting Securities;
• Includes all (i) issued and outstanding Options and (ii) Promised Options; and (iii) an Unissued Option Pool of at least 10%;
• Excludes, notwithstanding the foregoing, any increase to the Unissued Option Pool in connection with the Equity Financing.

This means that all shares (common and preferred) issued and outstanding, all convertible instruments issued, and all options (i.e. the ESOP) are included in the calculation of SOSV’s post-money equity holding. Please note this is just an example for discussion purposes only – the definition of Company Capitalization may vary and change over time from contract to contract.

The SOSV Program investment is typically made in the form of two separate SAFEs, being (i) the Cash SAFE (ii) the Program SAFE.  There is also the potential in certain circumstances for SOSV to make available, at its discretion and subject to such milestones as may be agreed on a case by case basis, an Additional Cash SAFE.

The cash investment is paid by SOSV directly to your Company, usually on a tranched basis, over the course of the SOSV Program (either HAX or IndieBio). The Cash SAFE will set out:

• how the cash  will be paid i.e. via bank transfer in US dollars;
• when the cash amount will be paid i.e. $X,000 on arrival at the Program and execution of the SAFE, $X,000 on day 30 and so on;
• any milestones that must be met before a tranche of the cash amount will be paid;
• how the SAFE will convert.

The Cash SAFE will convert to preferred equity in the Company on the basis of the stated valuation cap or discount. Whichever calculation (either the valuation cap or the discount)  results in the most number of shares for the Investor is the calculation that will be applied for the conversion of the Cash SAFE.

The Program SAFE relates specifically to the program costs of the relevant SOSV Program (either HAX or IndieBio).  These Program Costs are paid directly to the SOSV Program on the Company’s behalf by SOSV. The Program Costs includes  access to the SOSV locations (San Francisco, New York, and Newark) to desk space, state of the art lab and workshop facilities, high spec equipment, specialized materials, in-house technical experts, mentorship, extensive investor network, etc. 

The Program SAFE will convert to a fixed percentage of preferred equity in the Company. 

A fixed percentage SAFE means that in exchange for the investment amount from the Investor, the Company will issue a fixed percentage of the Company’s stock to the Investor at the point of conversion of the SAFE in accordance with the terms of that SAFE. Therefore there is no reference to a valuation cap or a discount, it is simply a fixed percentage SAFE.

As part of the SOSV Program investment, teams may be eligible for a further fixed percentage SAFE investment of $250,000 for 4.2%. SOSV may offer this Additional Cash SAFE at its sole discretion and such offer is contingent on performance over the course of the SOSV Program and such other milestones as SOSV may require.

The cash investment is paid by SOSV directly to your Company, usually on a tranched basis, over the course of the SOSV Program (either HAX or IndieBio). The Cash SAFE will set out:

• how the cash  will be paid i.e. via bank transfer in US dollars;
• when the cash amount will be paid i.e. $X,000 on arrival at the Program and execution of the SAFE, $X0,000 on day 30 and so on;
• any milestones that must be met before a tranche of the cash amount will be paid;
• how the SAFE will convert.

The Cash SAFE will convert to preferred equity in the Company on the basis of the stated valuation cap or discount. A valuation cap and discount SAFE calculates the number of shares the SAFE converts to based on either a valuation cap, or a discount on the price per share of the next equity financing round. Broadly speaking, one calculation will be used over the other (i.e. either the valuation cap or the discount) depending on which calculation garners the most number of shares for the Investor.

The events that trigger the conversion or termination of the Cash SAFE are as follows:

• Equity Financing
• Dissolution Event
• Liquidity Event
• Review Conversion

When any one of the above events happen, the Cash SAFE will, generally speaking, terminate. For example, in the case of an Equity Financing, the relationship between SOSV and the Company will be governed by a new set of investment documents.

An Equity Financing consists of the immediate sale of stock to third party investors in consideration for a minimum US dollar threshold amount known as the “Equity Financing Threshold”. The Equity Financing Threshold varies depending on each SOSV Program, but is usually between US$500,000 and US$1,000,000. On completion of the SOSV Program, one of the main goals for your Company will be to raise an Equity Financing within the first 12 months of signing the Cash SAFE.

The Equity Financing may itself be based on either a pre-money or post-money valuation. Convertible Debt, other SAFEs, loans, etc. are not counted towards the Equity Financing Threshold. This approach advocates for the raising of a solid Equity Financing rather than  “stacking” convertible instruments which may be detrimental to Founders (Pros and Cons of Convertible Debt).

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.

From the Equity Financing section above you will see that the SAFE automatically converts to equity when the Company secures an Equity Financing at the Equity Financing Threshold. The definition of Equity Financing also provides for an optional conversion mechanism which means that SOSV can, at its discretion, convert the SAFE to equity on the basis of either the Valuation Cap or the Discount (depending on which will provide the greatest number of shares) if the Company raises an equity financing round that is less than the required Equity Financing Threshold.

Why? Well, for example if you raised just below the Equity Financing Threshold instead of an amount at or above the Equity Financing Threshold, then SOSV may consider converting at that point rather than wait for another future round at or above the Equity Financing Threshold.

A liquidity event is generally a good thing for your Company.

Generally, a Liquidity Event includes a change of control,  a listing, or an Initial Public Offering (IPO). If a Liquidity Event occurs prior to the conversion or termination of the SAFE then the startup will generally be liable to pay the SOSV the greater of:

• a multiple of the SAFE investment amount; or
• the amount SOSV would have received in connection with such a Liquidity Event if SOSV’s purchase amount converted to equity immediately prior to the Liquidity Event.

Most people don’t realize, for example in an acqui-hire situation the Founders do very well via stock options in the purchasing entity, enhanced salary levels, etc., whereas investors may not get any significant return. The Liquidity Event clause aligns the investors with the Founders so that investors can get some level of return on their investment.

A Dissolution Event is quite different from a Liquidity Event discussed above.  A Dissolution Event generally means that the Company has voluntarily or involuntarily taken steps to dissolve or be wound up. In this case, SOSV has a “Liquidation Preference”.

A Liquidation Preference provides a preferential entitlement to, generally, a 1x liquidation preference, which would be equal to the direct cost of having financed and supported the Company through the relevant SOSV Program via the program costs and direct cash investment.

SOSV invests in companies with a view to being involved with these companies throughout each company’s life cycle, and building a strong relationship with the Founders. Put simply, this clause ensures that SOSV at a minimum can recover the costs of putting your Company through the SOSV Program, so that SOSV can find a new long term investment for the next Program. 

If none of the above events occur prior to the Anniversary Date, which is typically 12 months from the execution date of the Cash SAFE, SOSV will have the right to “Review” the Cash SAFE and the Company’s progress, and at that point can choose to either:

• convert all or any part of the Purchase Amount to the highest class of stock then in issue in the Company at a conversion price set out in the SAFE; or 
• allow the SAFE to remain unconverted and review the SAFE at a future date as determined by SOSV.

It is important to note that SOSV’s intention under the Review Conversion is not to seek repayment of the SOSV investment. SOSV invests in your Company at an early stage with the intention of building a long term supportive relationship to help you build and scale your Company. SOSV’s ultimate goal is to maintain equity in your Company as it grows and becomes more valuable, as opposed to simply getting a repayment on the SOSV investment. 

As the Company continues to grow and raise additional financing, the ownership percentage of all of the existing shareholders and security holders (Founders and investors) will be diluted. The aim of the pro rata right is to allow the existing shareholders and security holders, at their discretion, to purchase additional shares or convertible instruments at the then market rate to maintain their percentage ownership.

Under the terms of the pro rata right as detailed in the Cash SAFE, SOSV has the right at its discretion to acquire further equity in future financing rounds, based on the price and terms of such subsequent financing rounds to maintain SOSV’s pro rata equity percentage in your Company.

SOSV’s pro rata right right demonstrates both SOSV’s interest in maintaining its percentage ownership in the Company over time – from the very early stages right through to a potential sale – as well as SOSV’s intention to develop an ongoing, open, and productive relationship with the Company. SOSV has a history of maintaining its pro rata share (if not more!) in SOSV portfolio companies.  Follow-on investors generally look favorably on committed existing investors, rather than investors who might be “one round and done”.

This right, a.k.a the “MFN”, means that if the Company grants more favorable rights than those that exist in the Cash Safe either prior to entering into the Cash SAFE, or (ii) prior to conversion of the Cash SAFE  – then SOSV may choose to adopt those particular more favorable rights in addition to its current rights.

An ESOP or unissued option pool is an allocation of stock in the Company from which options to employees, advisors, etc. may be issued. Options are basically a right to purchase shares in the Company at a future date. Options may  be issued to employees, directors, advisors, officers, service providers, etc., generally at the discretion of the Board of Directors.

SOSV requires each investee startup participating on an SOSV Program to create and maintain an ESOP of at least 10% of the Company’s total issued stock on a fully diluted basis right up until immediately prior to an Equity Financing. An ESOP can enable a cash-strapped startup, that may not yet be in a position to offer market-rate salaries, to attract high-caliber employees, by affording the opportunity to those candidates to earn equity in a potentially successful startup, combined with an initially modest salary.

An ESOP can give employees the incentive to commit to the startup in order to achieve ultimate value through their ESOP holdings. Employees will experience the value of their contribution over time as the Company’s stock value increases as a whole.  

The Cash SAFE cannot be assigned by the Company without SOSV’s express prior consent.

SOSV can assign the Cash SAFE amongst its “Affiliates” as defined in the SAFE. Simply put, SOSV will not assign the Cash SAFE to any party outside the SOSV group. SOSV invests in companies via a certain fund and from time to time SOSV may have to assign certain investments between those internal funds or companies.

A fixed percentage SAFE means that in exchange for the investment amount (or deemed investment amount) from the Investor, the Company will issue an exact percentage of the Company’s stock to the Investor in accordance with the terms of that SAFE. On this basis, there is no explicit valuation cap or discount mentioned in the Program SAFE.

Immediately prior to the Equity Financing, SOSV’s equity will represent the exact pre-agreed percentage as set out in the Program SAFE.  The new money from the Equity Financing and increase in the ESOP above 10% (if any) will then dilute the SOSV shareholding (and all other shareholders) in the Company. The level of dilution will depend on the price per share and amount of new money raised in the Equity Financing.

The events that trigger the conversion or termination of the Program SAFE are:

• Equity Financing
• Dissolution Event
• Liquidity Event
• Review Conversion

When any one of the above events happen, the Program SAFE will, generally speaking, terminate. For example in the case of an Equity Financing, the relationship between SOSV and the Company will be governed by a new set of investment documents. 

An Equity Financing consists of the immediate sale of stock to third party investors in consideration for a minimum US dollar threshold amount known as the “Equity Financing Threshold”. The Equity Financing Threshold varies depending on each SOSV Program, but is usually between US$500,000 and US$1,000,000. On completion of the SOSV Program, one of the main goals for your Company will be to raise an Equity Financing within the first 12 months of signing the Cash SAFE.

The Equity Financing may itself be based on either a pre-money or post-money valuation.

Convertible Debt, other SAFEs, loans, etc. are not counted towards the Equity Financing Threshold. This approach advocates for the raising of a solid Equity Financing round rather than gathering or “stacking” convertible convertible instruments which may be detrimental to Founders (Pros and Cons of Convertible Debt).

The actual number of shares the Program SAFE amount will convert to is calculated by multiplying the pre-agreed percentage by the “Company Capitalisation”. The term Company capitalisation (as explained in the “What is the Post-Money SAFE” FAQ) will be defined in the Program SAFE and will basically set out all the different factors used in the relevant formula to calculate the SOSV percentage of your Company’s equity.

From the Equity Financing section above you will see that the SAFE automatically converts to equity when you hit the Equity Financing threshold. The definition of Equity Financing also provides for an optional conversion mechanism which means that SOSV can, at its discretion, convert the SAFE to the agreed equity percentage if your Company raises an equity financing round that is less than the required Equity Financing Threshold.

Why? Well, for example if you raised just below the Equity Financing Threshold instead of an amount at or above the Equity Financing Threshold, then SOSV may consider converting at that point rather than wait for another future round at or above the Equity Financing Threshold.

A Dissolution Event is quite different from a Liquidity Event discussed above.  A Dissolution Event generally means that your Company has voluntarily or involuntarily taken steps to dissolve or be wound up. In this case, SOSV has a “Liquidation Preference”.

A Liquidation Preference provides a preferential entitlement to, generally, a 1x liquidation preference, which would be equal to the direct cost of having financed and supported the Company through the relevant SOSV Program via the program costs and direct cash investment.

SOSV invests in companies with a view to being involved with these companies throughout each company’s life cycle, and building a strong relationship with the Founders. Put simply, this clause ensures that SOSV at a minimum can recover the costs of putting your Company through the SOSV Program, so that SOSV can find a new long term investment for the next Program. 

A liquidity event is generally a good thing for your Company.

Generally, a Liquidity Event includes a change of control,  a listing, or an Initial Public Offering (IPO). If a Liquidity Event occurs prior to the conversion or termination of the SAFE then the startup will generally be liable to pay the SOSV the greater of:

• a multiple of the SAFE investment amount; or
• the amount SOSV would have received in connection with such a Liquidity Event if SOSV’s purchase amount converted to equity immediately prior to the Liquidity Event.

Most people don’t realize, for example in an acqui-hire situation the Founders do very well via stock options in the purchasing entity, enhanced salary levels, etc., whereas investors may not get any significant return. The Liquidity Event clause aligns the investors with the Founders so that investors can get some level of return on their investment.

If none of the above events occur prior to the Anniversary Date which is typically 12 months from the execution date of the Program SAFE, SOSV will have the right to “Review” the Program SAFE and the start-up’s progress, and at that point can choose to either:

• convert all or any part of the Program SAFE investment to common stock based on a fixed percentage of the Company capitalisation (as defined in the SAFE); or
• allow the Program SAFE to remain unconverted and review the Program SAFE on a future date as determined by SOSV.

It is important to note that SOSV’s intention under the Review Conversion is not to seek repayment of the SOSV investment amount. SOSV invests in your Company at an early stage with the intention of building a long term supportive relationship to help you build and scale your Company. SOSV’s ultimate goal is to maintain equity in your Company as it grows and becomes more valuable, as opposed to simply getting a repayment on the SOSV investment. 

As the Company continues to grow and raise additional financing, the ownership percentage of all of the existing shareholders (Founders and investors) will be diluted. The aim of the pro rata right is to allow the existing shareholders (usually investors, like SOSV), at their discretion, to purchase additional shares or convertible instruments at the market rate at that time to maintain their percentage ownership.

Under the terms of the pro rata right as detailed in the Program SAFE (either a direct right attaching to the equity into which the Program SAFE converts, a right to participate in a convertible instrument round before the Program SAFE converts, or by a separate “Pro Rata Rights Agreement”), SOSV is entitled to acquire further equity in future financing rounds, based on the price and terms of such financing rounds, generally to maintain SOSV’s pro rata (pre-financing) equity percentage in your Company.

SOSV’s pro rata right right demonstrates both SOSV’s interest in maintaining its percentage ownership in your Company over time – from the very early stages right through to a potential sale – as well as SOSV’s intention to develop an ongoing, open, and productive relationship with your Company. SOSV has a history of maintaining its pro rata share (if not more!) in SOSV portfolio companies. Follow-on investors generally look favorably on committed existing investors, rather than investors who might be “one round and done”.

An ESOP or unissued option pool is an allocation of stock in the Company from which options to employees, advisors, etc. may be issued. Options are basically a right to purchase shares in the Company at a future date. Options may  be issued to employees, directors, advisors, officers, service providers, etc., generally at the discretion of the Board of Directors.

SOSV requires each investee startup participating on an SOSV Program to create and maintain an ESOP of at least 10% of the Company’s total issued stock on a fully diluted basis right up until immediately prior to an Equity Financing. An ESOP can enable a cash-strapped startup, that may not yet be in a position to offer market-rate salaries, to attract high-caliber employees, by affording the opportunity to those candidates to earn equity in a potentially successful startup, combined with an initially modest salary.

An ESOP can give employees the incentive to commit to the startup in order to achieve ultimate value through their ESOP holdings. Employees will experience the value of their contribution over time as the Company’s stock value increases as a whole.  

100% of the intellectual property (IP) must belong to the company. This means that the Company will own all registered IP (patents, trademarks, trade secrets, design rights etc) and all IP held by the Founders, employees and/or consultants with regard to all work and projects conducted for the benefit of the Company is assigned and owned by the Company.

It is important that you sign a Confidential Information and Invention Assignment Agreement (commonly referred to as a “CIIAA”). This ensures that all IP, in all forms, whether registered or merely in the realm of ideas and concepts are the property of the Company and shall remain the property of the Company whether the developer of the IP remains with the Company or not.

Note that SOSV will not have any right to your IP by virtue of your participation in the Program. The Program will help you develop your IP, but this does not mean that SOSV will have any rights over your IP. 

What is Vesting?

Vesting is the process of earning your shares over time. Once your shares have vested you can exercise them. Vesting helps to encourage Founders and employees to commit to the Company for longer than they might otherwise. 

A typical vesting schedule is over four years with a one year cliff. This means that your shares will vest over 4 years, with the first 25% vesting in after your first 12 months with the Company and the remainder typically vesting on a monthly basis until the end of the 4 year term. 

Standard vesting provisions would allow an additional year of accelerated vesting in the event of a sale, merger, consolidation, etc., provided that such Founder is still with the Company at the time of sale, and would have contributed to the value being added that attracted the interest of a purchasing party.

It is important that each Founder (and any other party subject to vesting in your Company) sign a form of Restricted Stock Purchase Agreement (commonly referred to as an “RSPA”) reflecting their particular vesting provisions. 

What are SOSV’s Vesting Requirements for Founders? 

As part of the Program investment,  SOSV requires that all Founders’ shares are subject to four year vesting with a one year cliff, from the date of the SOSV investment.

In the event a Founder leaves the Company prior to an Equity Financing, SOSV requires that all of the respective Founder’s shares, both vested and unvested, are re-purchasable by the Company. The unvested equity would revert to the Company for nominal value and vested equity could be repurchased by the Company for the then fair market value of the vested shares. 

This is required because prior to the Company’s first Equity Financing the Company is in a particularly early stage of their growth and cannot afford for any Founder to leave and retain a portion of the cap table. It is critical that all Founders holding equity in the Company are continuously earning their equity by working and growing the Company over the long term. By ensuring both the vested and unvested equity reverts to the Company the equity can be used  to attract new Founders or employees to move the Company forward. 

You will also need to provide a copy of each Founders RSPA to SOSV prior to the execution of the SAFEs. These RSPAs will need to reflect SOSV’s vesting requirements as set out above. Any amendment to these RSPAs prior to an Equity Financing must be approved by SOSV in advance.

This right, a.k.a “MFN”, means that if the Company grants more favorable rights than those that exist in the SOSV investment instrument(s) either (i) prior to entering into the SOSV SAFE, or (ii) after SOSV invests into your Company and prior to conversion of the SOSV instrument – then SOSV may choose to adopt those particular more favorable rights in addition to its current rights.

The Put Right states that at SOSV’s discretion and upon conversion or ownership of shares in the Company, SOSV may choose to sell back its equity holding to the Founders of the Company for the nominal amount of $1. There is no onus on the Company to repay the full investment amount to SOSV. However in order to transfer the shares back to the Founders a nominal payment must be made. The $1 is simply a nominal payment or consideration for this transaction.

It is an unfortunate reality that many companies in which SOSV invests will not go on to secure tangible future value. They will either dissolve or will just become stagnant with no further financing progression since SOSV’s initial investment. Of course, this risk is mitigated greatly by the value added to the Company over the course of the Program.

At the time of SOSV’s initial investment, SOSV does not take a board seat at such an early stage in the Company. However, from the date of SOSV’s initial investment SOSV will have the right to appoint an Observer to the Company’s board meetings. This Observer Right does not grant SOSV any voting rights at such board meetings.

The reason SOSV asks for an Observer Right is to facilitate SOSV bringing additional value to your Company, allows SOSV the opportunity to secure a greater understand of the operations of your Company, and to contribute to the decision making process at Board level. This may be especially relevant when you are in the process of granting a director seat to another investor or third party when Founders may need someone in their corner to help negotiate or advise them on what is reasonable in certain instances. SOSV sees itself as aligned with the Founders (given the early stage of the SOSV investment and the SOSV Program structure) and as such SOSV wants to be able to contribute and share with you its wealth of experience in inception investment.

SOSV will have the right to certain information relating to the Company and its operations, including unaudited financial statements, budgets, brief monthly updates.

The preparation of regular updates (financial and otherwise) helps to focus the minds of Founders and allows them to assess many factors such as; whether the Company is growing at it’s projected pace, are there areas requiring specific attention and what are the Company’s strengths and weaknesses, etc. The information provided will also strengthen the relationship between SOSV and the Company by creating transparent and open channels of communication.

It is no coincidence that the best performing companies at SOSV are those that have always been open and transparent with information. As well as illustrating wonderful discipline, it shows all investors (including SOSV) that the Founders and the Company have a solid handle on their financials, strategy, customers, products and vision. This can contribute to SOSV (and all other investors) in having more confidence to participate at pro-rata in the Company’s future funding rounds.

SOSV requires that, for as long as SOSV holds any shares in the Company, SOSV will be afforded the status of “Major Investor”, or any other similar term, in all subsequent rounds of financing. The intent is to  maintain information, observer and pro rata rights. By requiring Major Investor status in this manner it mitigates against SOSV being excluded from maintaining these rights throughout the life cycle of the Company. 

If the Company raises funds through debt or equity before an Equity Financing, SOSV has the right to participate in this round as if SOSV already holds equity in the Company. The SOSV participation will be based on the percentage of equity SOSV would hold if each of the Cash SAFE and the Program SAFE had already converted to equity. For example, if the Program SAFE conversion percentage is 7% and the Cash SAFE conversion percentage is 7.2% (based on a valuation cap of $2.7 million and an investment of $200,000), SOSV’s right to participate before conversion would be 14.2%.

SOSV reserves the right to invest further into your Company up to the greater of 20% or US$200,000 of any financing either:

• prior to an Equity Financing where the Company enters into a convertible instrument or convertible round; or
• upon an equity financing (where your Company issues shares immediately).

SOSV only gets to exercise this right once. It does not live on in perpetuity. Remember that it is up to 20% or US$200,000, meaning SOSV may participate for 5%, 10%, or 20% of the debt or equity round, at SOSV’s sole discretion. This is good for your Company as other new investors will generally like to see existing investors inject more cash into your Company.

If a Founder is removed from the Company under contentious circumstances, no settlement, equity redemption, or payment will be given to the Founder without (i) investor’s consent, and (ii) the option for the investors to exit their investment in the Company first.

To clarify, this does not apply if a Founder leaves the Company amicably and their shares are repurchased according to established vesting provisions.

The purpose of this clause is to prevent the Company from getting involved in prolonged negotiations and potentially litigation to the potential detriment of the success of the Company and as a consequence to the detriment of the Investor’s investment. Requiring the Company to pay investors before any settlement may discourage ongoing litigation, giving the Company a better chance to focus on growth without the threat of legal disputes.

SOSV’s Programs (HAX and IndieBio) are designed to help your Company realize its maximum potential. The SOSV Program itself cannot do the work for you. Rather, SOSV provides expertise, mentorship, certain technical or scientific resources and expert advice and introductions over the course of the Program. It is also the starting point of a long-term relationship between SOSV and the Founders. With this in mind, SOSV expects all teams to fully participate in the Program and be onsite at the relevant SOSV Program location as required. SOSV knows that there are sometimes meetings and trips outside the Program that cannot be avoided but on the whole, if you are on the Program, it is expected that you will give it your full attention, terminating any other employment, and participate fully in the itinerary of the Program in order to get the maximum benefit for you, your team and your Company. Each SOSV Founder is required to comply with the terms of the SOSV Code of Conduct.

The Program SAFE includes a provision detailing the Program’s expectations of you to participate in the SOSV Program. For example, it is expected that you will participate in the Program in a collegiate manner, that you will give the Program 100% of your time, and that you will terminate all other employment prior to the start of the SOSV Program.

The SOSV Program’s investment amount is tranched and each tranche is attached to a milestone of some sort. SOSV’s desire is that all selected teams will flourish over the course of the Program and that there would never arise any need to ask a team to leave. However on extremely rare occasions if the relevant Program Director believes, based on failure to meet milestones, failure to participate fully in the Program (i.e. missing meetings, failure to show up to the program on a consistent basis, engaging in anti social behavior, etc.), or such other reasonable grounds, the Program Director may have to ask the Founders and their Company to leave the Program.

If a Company is removed from a Program, the Company will be liable to repay to SOSV the total SOSV investment amount received to date, including Program Amount. If the Company is not in a position to repay the investment amount SOSV will retain all rights in the Company in accordance with the rights contained in Cash SAFE and Program Safe.

This provision facilitates discussions focused on partial exit of SOSV’s early stage investment on or after the 5th anniversary of the initial SOSV Program investment.  SOSV generally has  the right to exit its equity position at its discretion without restriction. The intention of this provision is to raise awareness within the SOSV portfolio at an early stage that SOSV will seek to secure a partial exit, for example in oversubscribed rounds, subsequent to the initial SOSV investment. For the avoidance of doubt, SOSV will retain the option to sell its equity, but is not obligated to do so, and there is no obligation on the Company or the Founders to redeem or buy back SOSV’s equity position on or after the 5th anniversary of the initial SOSV investment. 

SOSV is interested not just in an ultimate percentage return, but in maintaining its percentage ownership in and providing continued support to teams with which SOSV has been involved in and committed to since the very early stages. By facilitating a return on the early SOSV Program investment, SOSV can have the ability to continue to re-invest and support its portfolio in financing rounds post-Program through separate SOSV funds. This clause facilitates a sale by SOSV of some of its equity position to secure a return while the Company is still privately owned.

The Program SAFE cannot be assigned by the Company without SOSV’s express prior consent.

SOSV can assign the Program SAFE amongst its “Affiliates” as defined in the SAFE. Simply put, SOSV will not assign the Program SAFE to any party outside the SOSV group. SOSV invests in companies via a certain fund and from time to time SOSV may have to assign certain investments between those internal funds or companies.

As part of the total SOSV Program investment, your Company may be eligible for a further fixed percentage Cash SAFE investment of $250,000 for 4.2%. SOSV may offer this additional Cash SAFE to teams at SOSV’s sole discretion, and such offer is contingent on performance over the course of the SOSV Program, and such other milestones that SOSV may require. 

The terms of such additional Cash SAFE will be generally the same as the Cash SAFE outlined above, but will have a fixed percentage allocation to SOSV as opposed to any reference to a Valuation Cap or Discount.