Introduction
Startups require initial investments that are often large.
So where to find the resources once the availability from savings and from and group so called “family and friends” who believe in the idea is finished?
In Italy there is no shortage of tools that meet this need, among which we can list subsidized finance that often requires long lead times that leave one in uncertainty, crowdfunding, venture capitals, business angels and incubators.
One option recently introduced in Italy but widely used overseas is that of SAFE, which is characterized by simplicity and celerity.
What is SAFE
The term SAFE is an acronym for “simple agreement for future equity”.
This instrument, popularized by the incubator Y Combinator (https://www.ycombinator.com/), is enjoying some success among SIlicon Valley starups.
SAFE works in a simple way: the investor disburses a sum of money to the startup with no right to repayment. At the time of disbursement, a conversion into shares or units of the startup is expected, and is deferred to a different time, specifically when the next first round takes place, or the first round above a certain amount, or even in case of exit.
In this way, the valuation of the startup can also be deferred to a later time, as can the exchange ratio.
This should make it possible to greatly reduce the bargaining time between startup and investor, which often leads to slowdowns or even the breakdown of negotiations.
When to use the SAFE
We have seen that with the SAFE, the investor (or safe holder), does not become entitled to any claim, as he or she is not entitled to any repayment of what has been paid to the startup.
It should also be noted that the SAFE does not entail for the investor any voting rights, and therefore does not affect the management of the company (also called corporate governance).
Lastly, according to the Italian Revenue Agency (Summary No. 1/2023), an “immediate participation in losses and prospective participation in profits” is noted for the SAFE; therefore, the investor participates in losses; while he or she participates in profits are upon the occurrence of the conditions defined at the time of the investment, because only at that time the conversion into units or shares take place.
Importance of proper contract drafting
SAFE, therefore, as an instrument characterized by simplicity, does not require special formalities; moreover, its adaptability to the needs of each specific case can be an advantage.
The contractual model, can be varied, for example, by providing:
- a money value floor: a minimum value of the round;
- a cap: a ceiling to the startup’s valuation;
- a discount: a discount in favor of the investor upon conversion;
The contract can also be characterized by the combination of several variants.
Precisely because of this, it should not be forgotten that the contracting stage plays a key role, without this meaning distorting SAFE’s purpose of safeguarding simplicity and celerity.
The Legal Nook 