SAFEs In Saudi Arabia And How To Use Them :
SAFE means Simple Agreement for Future Equity. Unlike the typical convertible note, which works as a debt instrument, a SAFE is essentially a convertible security that is not a debt. It is a common equity-funding document used by start-ups and investors in early-stage funding deals. A SAFE allows investors and a start-up company to achieve the same goal, i.e., the conversion into equity in a future-priced equity round.
Background of SAFEs
The creation of SAFE was a simple replacement for convertible notes. A famous tech accelerator from Silicon Valley, Y Combinator lawyer Carolynn Levy authored the SAFE in 2013. As an investment vehicle, they are not debt instruments, meaning there are no interest rates or maturity dates.
SAFE, since its inception, has proven to be one of the most preferred alternatives for investors to fund start-ups rather than going through convertible notes or shares. When the investor invests in a company using a SAFE, he receives the right to purchase right in a future equity round, though subject to prior laid down parameters.
Purpose of SAFEs within the context of Saudi Arabia
As a nation, Saudi Arabia is one of the hubs that encourage the growth of start-ups. Although SAFE, as an investment scheme for start-ups, is a relatively high-risk method because if the company fails, the SAFE becomes worthless. Regardless, it is still a preferred means that offers significant advantages.
It provides investors and companies alike ease, lower transaction costs, and speed of execution. In addition, investors can invest in start-ups with potential substantial returns. On the part of start-up companies, they can raise capital from early-stage investors without the need for back and forth on negotiations.
For Saudi Arabia, as a nation that supports early-stage investments, SAFE provides a structure that allows investors to invest in a company without needing to be a member or acquire any shareholder rights and risks. On the other hand, since SAFE is not a debt instrument, companies can benefit because they are not fearful of their start-up being insolvent.
How do you use SAFEs?
SAFE has eliminated the interests and maturity components that convertible notes, as debt instruments, contain. As mentioned above, SAFEs are used as an investment vehicle that allows investors and companies to reach the same goal.
You use SAFE by identifying the start-up company you hope to invest in. The company and investor agree on the basics of a SAFE, which includes valuation cap, discounts, etc. After the agreement, both parties sign the SAFE document, and the investment is made.
Every investor that funds a company through a safe has the right to acquire future equity in a company. An event triggering the acquisition could be a liquidity, merger, or an initial public offering. A SAFE investor has the right to purchase the same type of equity that any other future investor will obtain.
Like every investment decision, it remains crucial that companies and investors understand the terms of their agreement. Integrating SAFE into Saudi Arabia’s investment landscape can benefit both companies and investors.