Post-Money SAFE Agreement and Malaysian Startups

Introduction to SAFE Agreements

The SAFE Agreement stands for “Simple Agreement for Future Equity”. The SAFE was pioneered by Y Combinator, a technology startup accelerator. When it was first introduced in 2013, the SAFE was a pre-money valuation cap, but in 2018 redrafted the SAFE to a post-money valuation cap focus. The SAFE has become popular as a convertible security instrument for startups to raise funds, and it is attracting attention from startups in this region (South East Asia) as well.

Essentially , SAFE Agreements are simplified agreements for a seed round investor to invest into a startup, while securing its expectation to receive shares when the startup reaches the Series A funding round. How much shares a seed round investor will receive under the SAFE post-money valuation cap model, is determined by the valuation cap, and the discount rate (if applicable).

Seed round investors are early stage investors into a startup. Y Combinator describes it as follows:

The initial capital raised by a company is typically called “seed” capital.

Y Combinator, “A Guide to Seed Fundraising“

Four varieties of the SAFE Agreement

There are four variants of the SAFE agreement which have been made available at the Y Combinator website. All four of them are focused on post-money valuation cap.

1. MFN (Most Favoured Nation), without Discount and Without Valuation Cap;
2. Discount only;
3. Valuation Cap only;
4. Both Discount and Valuation Cap.

Download them here.

Pro Rata Side Letter

There is also a pro rata side letter, which acts as a supplementary agreement. Essentially, it gives the investor a right to participate in the Series A funding round. For some investors, it may be important for them to “top up” their shares in the startup if they believe that the startup will do well.

An MFN SAFE does not usually require the pro rata side letter, according to the Post-Money SAFE user guide.

Valuation Cap and Discount Rate

The valuation cap is agreed upon by the parties, as to what the maximum valuation of the startup could be, at a later date. It is not meant to be a valuation at the present date. An investor that invests with a lower valuation cap, will get more shares when the startup goes for its Series A.

The Discount Rate in the SAFE Agreement is the percentage that an investor pays, compared to the full price of the stock. The difference of a “discount rate” from a “discount” is this: Discount rate is a percentage of the price (that is payable), rather than a percentage off the price (that is rebated from payment).

Under a SAFE, there are several events, which trigger the contract to the next stage.

1. A “Liquidity Event”, in which a Series A investor invests into the startup;
2. A “Dissolution Event”, which the startup is wound up.

When one of these events occur, the seed round investor is allocated shares in the startup. In the Liquidity Event, the seed round investor’s shares, together with the startup founders’ shares, will then be diluted, by the investment of the Series A investor.