SAFE Series 1: Introduction To Simple Agreement For Future Equity

Nigeria’s tech startup ecosystem is growing exponentially. With the likes of Flutterwave, Interswitch, PiggyTech, etc. pulling a lot of traction and spurring others to build, the future is bright for startups in Nigeria.

While their growth and success is enviable, the core to building to that point is an amalgam of funding and customer satisfaction. Funding helps you build for the customers, as iterations, fixes, developments, and expansion plans would not be feasible without the requisite funds to back it up. Many startups with potential in Nigeria have failed because of a lack of funding. Worthy mention is Lazerpay, who TechCabal described as “High on hope but short on capital."

For those able to surmount the huddle of finding an investor, the next conversation to be had is on the funding agreement type that best suits the stage their startup is in. This makes or mar the investor-founder relationship and ultimately, the success of the startup. The ability of the startups to choose the best agreement option for their stage of business portends growth and ease of doing business. One of such agreements primarily employed in the ecosystem is the Simple Agreement For Future Equity (SAFE).

What Is The Simple Agreement For Future Equity?

A SAFE is an investment contract between an investor and a startup, that gives the investor rights to receive equity of the company at a future date, upon the happening of a liquidity event. A Liquidity event is any event that brings money into the startup, for example, new funding, IPO, sale, etc.

Therefore, the SAFE will be converted to shares when the company raises new money.

The SAFE is neither a debt nor equity. It does not place an obligation on the startup to repay the investment sum, like a loan and it does not automatically bestow equity on the investor. With the SAFE, the investor is buying the rights to equity in the future; that is, when the startup raises new money, the investment sum would be converted into shares.

How Does A Safe Work?

Startups face numerous unknowns; they have little to no revenue and are hard to value. Regardless, before an investor invests in a startup, they would want to know how valuable the startup is. Now since the startup in question currently has no valuation, the SAFE comes to the rescue.

For example, Goldman Sachs Tech Limited receives $10,000 investment through a SAFE. In 3 years, the company has experienced a lot of growth and are now raising funds to move to the next stage of business. The investor of $10,000 in Goldman Sachs Tech limited would convert that amount into equity of the company at the valuation of that new priced round. So their $10,000 in the company in 2020 can be valued at $30,000 in 2023 when appreciated at the new value of the Startup.

What Is The Advantage of using a SAFE?

When having conversations about funding agreements with my friends that are founders, I would usually tell them that “a SAFE is safe.” Investors and startups in recent times use the SAFE option frequently because of how seamless it is to undergo, and the less strain it places on the founders. Some of the advantages of the SAFE are:

1. The simplicity of a SAFE boycotts the cumbersome legal documents that would have been required for normal investment agreements, thereby saving the investor and startup, time and money.

2. The SAFE allows the investor to invest in multiple companies without the legal stress of drafting multiple investment agreements.

3. Since it is not a debt, it allows the founder to maintain a solid financial standing, especially at the start of business. It takes the founder’s mind off the repayment of a loan and allows them to focus more on building and scaling the business.

4. The SAFE does not accrue interest, unlike loans. So if the startup fails, the founder is not under any obligation to repay the investment amount, unless funds are retrieved from the sale of the startup.

However, where the startup succeeds, the investors’ rights to the company are typically larger than those of the new investors.

In Conclusion,

The ability of a SAFE to be low-risk or high-risk depends on the founder, the investor, and the terms of the agreement. Thus, the agreement must be undertaken on the back of appropriate guidance. This means that it is important to speak to a lawyer to draft these agreements for your startup.

Nonetheless, investments are risky endeavors, and this should not deter founders and investors from towing the SAFE investment option. Nigerian startup founders need all the funding they can gain access to and should explore options that afford them that, thus, the viability of a SAFE.

Yours In Tech Solidarity,

Victoria