SAFER Note

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About the SAFER Note

A "SAFER Note," short for "Simple Agreement for Future Equity with ROFR," is a financing instrument designed to provide a streamlined and founder-friendly way for investors to provide financial and hands-on support for early-stage startup companies. It combines elements of a SAFE (Simple Agreement for Future Equity) and a Right of First Refusal, offering certain advantages to both investors and startup founders. This hybrid structure enables investors to validate the investment opportunity while providing a clear mechanism for future equity conversion and potential additional capital deployment.

Here's a detailed description of the components and mechanisms typically found in a SAFEr Note:

‍Investment Terms
The SAFER Note outlines the investment terms agreed upon between the investor and the startup. This includes the amount of investment, any accompanying rights or privileges, how funds must be allocated, and the terms for future equity conversion or repurchase.

Initial Investor Commitment
The SAFER Note stipulates that the initial investment commitment from the investor represents a predetermined percentage of the eventual larger investment round. Typically, this commitment ranges from 5% to 15% of the anticipated and intended total investment amount.

‍Smaller Initial Investment: By committing to invest only a fraction of the total anticipated investment amount upfront, investors can effectively allocate a smaller portion of their budget to validate the opportunity presented by the startup. This mitigates risk while still allowing them to participate in the early stages of the company's growth.

‍Validation of Opportunity: The initial investment serves as a validation of the startup's potential, signaling confidence from the investor in the company's vision, team, and market opportunity. It provides crucial early-stage capital to fuel the startup's growth and development.

‍Setting Price and Terms: The initial investor commitment establishes a baseline for setting the price and terms of the SAFER Note, including any valuation cap, discount rate, or repurchase option. This ensures that subsequent investors have a clear reference point for their investment decisions.

‍Gradual Capital Infusion: The staged approach to investment allows the startup to demonstrate progress and achieve key milestones before raising additional capital. This can help optimize the company's valuation and increase investor confidence for future rounds of financing.

Flexibility for Investors: By committing to invest a smaller initial amount, investors retain flexibility and optionality in their investment strategy. They can assess the startup's performance and market traction before deciding to allocate additional capital in subsequent rounds.

‍Future Equity Conversion
Similar to a traditional SAFE, the SAFER Note provides the investor with the option to convert their investment into equity in the startup at a later date, typically upon the occurrence of a future equity financing round. This allows the investor to participate in the potential upside of the company without determining a specific valuation at the time of investment.

Price Floor Provision
‍The SAFER Note may include a price floor provision to protect the founder from potential downward renegotiation of the initial terms. This provision establishes a minimum valuation or price per share for the future equity conversion or repurchase, guaranteeing that the founder will not receive less favorable terms than those initially agreed upon.
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Guarantee of Initial Terms: The price floor ensures that the founder is protected from any subsequent decreases in valuation or unfavorable changes in the investment terms. It serves as a safeguard against downward renegotiation that may impact the startup's valuation.

‍Founder Confidence: By providing this assurance of maintaining the initial terms, founders can have greater peace of mind knowing that their investment is protected from potential downside risks.
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‍Legal Enforceability: The price floor provision is legally enforceable, and any attempt to renegotiate the terms below the established floor would constitute a breach of contract. This ensures that the founders' rights are upheld and protected under the terms of the SAFER Note.

Right of First Refusal
In exchange for an investor providing “SAFER” investments; they are also securing themselves the opportunity to be the first party able to offer the larger equity round of financing. Founders and their startups are not able to seek investment from other outside investors without the initial “SAFER” investors being given the opportunity to move forward with the larger equity financing. If they choose to formally pass, the terms of their note will remain available for conversion with an investment from a different investor.

‍Repurchase Option
One unique feature of the SAFER Note is the inclusion of a repurchase option. This provision allows the startup company to repurchase the investor's shares at a predetermined price under certain circumstances. For example, if the startup reaches a specific milestone or achieves a certain level of success within a specified timeframe, the company may have the option to repurchase the investor's shares at a predetermined price.

‍Investor Protection Provisions
The SAFER Note may include certain investor protection provisions to safeguard the investor's interests. These provisions could include rights to information, governance rights, or anti-dilution protections.

‍Maturity Date
The SAFER Note typically includes a maturity date, after which the note will either convert into equity or be subject to repurchase by the startup. This provides clarity on the timeline for the investment and ensures that the startup has a defined period to achieve its objectives.

‍Legal Documentation
Like other financing documents, the SAFEr Note is a legally binding agreement between the investor and the startup. It is drafted by legal professionals to ensure compliance with relevant regulations and to protect the interests of both parties.

The SAFER Note offers a flexible and founder-friendly financing option for early-stage startups and investors. It allows investors to validate the opportunity presented by the startup with a smaller initial investment while providing a clear mechanism for future equity conversion and potential repurchase. Additionally, the inclusion of a repurchase option provides an additional layer of flexibility for both parties, allowing the startup to control its capitalization structure as it progresses towards its growth objectives.