Overview of a SAFE Pro Rata Rights Agreement
What is a SAFE Pro Rata Rights Agreement?
A SAFE Pro Rata Rights Agreement is a letter by which a company gives pro rata rights to a SAFE investor.
By using a SAFE Pro Rata Rights Agreement, a SAFE investor has the right to purchase more shares in a company if the company raises a further round or rounds of financing.
The rights under a SAFE Pro Rata Rights Agreement is only exercisable after the SAFE has converted into preferred shares of the company at equity financing.
What is a SAFE?
- if the company achieves “equity financing”, the investor will receive preferred shares with the same rights and preferences as the preferred shares to be issued by the company at the equity financing (in which case the conversion price will be the “Safe price”. See below);
- if the company is sold or gets listed (a “liquidity event”), the investor is free to choose between (i) receiving cash back for the purchase amount; or (ii) receiving ordinary shares of the company (in which case the conversion price will be the “liquidity price”, see below); or
- if the company is dissolved (a “dissolution event”), the investor will receive cash back for the purchase amount. You should note that if the company’s assets are not enough to pay back investors of all the SAFEs issued by the company before such time, the available assets of the company will be distributed with equal priority and pro rata among all investors of SAFEs.
- a Convertible Note has a maturity date upon which, if the conversion doesn’t take place, the company will return the investment amount to the investor, but a SAFE does not;
- a Convertible Note carries interest, but a SAFE does not; and
- a Convertible Note identifies the minimum amount of funds to be raised at the equity financing, but a SAFE does not.
Key terms explained
- the price per preferred share to be offered at the equity financing;
- the price per preferred share to be offered at the equity financing with a discount;
- the price per share determined by a pre-negotiated valuation cap (see below); or
- the lower of option 2 or option 3.
How to create a SAFE
Key points included
- Date of the Simple Agreement for Future Equity (SAFE);
- Amount of investment that the investor has made; and
- Within how long can the investor exercise the pro rata rights.