The document is a legal agreement called a Safe (Simple Agreement for Future Equity) between a company called Acme Corporation and an investor called CashCowVC. The investor gave the company $1 million. In exchange, the investor has the right to receive shares of the company's stock in certain situations. These include if the company raises more money by selling preferred stock, if the company goes public or gets acquired, or if the company shuts down. The agreement describes how many shares the investor can get in each situation. It also says the investor's rights to get shares are similar to the rights of preferred stockholders. The agreement has legal language explaining it is binding and the company has authority to enter into it. There are also representations that the company owns its intellectual property and the investor is an accredited investor.
The SAFE gives CashCowVC the right to receive equity in Acme Corporation in the event of an equity financing or liquidity event. This provides significant upside potential for CashCowVC's investment.
CashCowVC's liquidation preference puts it ahead of Acme's common stockholders in receiving proceeds in a liquidity event. This downside protection favors CashCowVC.
Overall, the SAFE provides more rights and protections to the investor CashCowVC compared to the company Acme Corporation.
Questions for your attorney
What is the purpose and rationale for the post-money valuation cap? Does it represent the company's actual valuation?
What are the key rights and preferences of the SafePreferred Stock compared to common stock?
What are the obligations and requirements for the company if an equity financing or liquidity event occurs?
What conditions or events would terminate the Safe and relieve the company of obligations?
Are there any other material terms, rights, or obligations not summarized in the overview?
What share of the company would my investment represent on a fully diluted basis?
What veto rights or protective provisions do I have under the Safe terms?
What are my liquidation rights and how do they compare to other shareholders?
Are there restrictions on transfer or assignment of my Safe?
What are the tax implications of my Safe investment?
The Post-Money Valuation Cap is not clearly defined, leaving the conversion price uncertain.
The liquidation priority for the Safe is not clearly specified compared to other classes of stock.
The conditions and procedure for terminating the Safe are not specified.
There are no provisions governing the transfer or assignment of the Safe.
The governing law jurisdiction is not specified.
The rights, privileges and restrictions of the Safe Preferred Stock are not clearly defined.
There is no specification of the timeline or procedure for receiving payouts upon liquidity events.
The qualifications and limitations on drag-along rights are not clearly specified.
Representations and warranties made by the company are limited.
Transferability of the Safe is restricted.
Acme Corporation issued CashCowVC the right to certain shares of the Company’s Capital Stock in exchange for the payment by CashCowVC of $1,000,000.
If there is an Equity Financing, this Safe will automatically convert into the greater of: (1) the number of shares of Standard Preferred Stock equal to the Purchase Amount ($1,000,000) divided by the lowest price per share of the Standard Preferred Stock; or (2) the number of shares of Safe Preferred Stock equal to the Purchase Amount ($1,000,000) divided by the Safe Price.
If there is a Liquidity Event before termination, CashCowVC will receive a portion of Proceeds equal to the greater of: (i) the Purchase Amount ($1,000,000) or (ii) the Conversion Amount.
If there is a Dissolution Event before termination, CashCowVC will receive a portion of Proceeds equal to the Cash-Out Amount ($1,000,000).
CashCowVC paid $1,000,000 to Acme Corporation.
CashCowVC's right to receive its Cash-Out Amount ($1,000,000) has liquidation priority that is: (i) Junior to outstanding indebtedness and creditor claims; (ii) On par with other Safes and/or Preferred Stock; and (iii) Senior to payments for Common Stock.
The document states that the securities or investments involved in this agreement between Acme Corporation and CashCowVC are not officially registered under the Securities Act of 1933, or under certain state laws. This means that these securities cannot be offered, sold, transferred, promised or used as collateral unless allowed by the agreement itself, the aforementioned Act, or state laws. These actions can only be taken if the securities are officially registered or if there's an exemption allowing it.
This is about a company named Acme Corporation.
This is an agreement about a possible future investment. Acme Corporation and CashCowVC have agreed that CashCowVC will give the company money now, and in exchange, they might get ownership in the company later. This will only happen if certain events take place, like the company being sold or a new round of investment. The amount of ownership CashCowVC will get depends on how much money they gave and the value of the company when the event happens.
This document confirms that CashCowVC (the investor) paid $1,000,000 to Acme Corporation (the company) around December 1, 2023. In return for this payment, Acme Corporation gives CashCowVC the right to own some of its company shares under certain conditions.
Acme Corporation and CashCowVC have agreed to use a standard form for their agreement, which they found on a specific website. They assure each other that they haven't changed anything in that document, except for filling in the empty spaces and terms within brackets.
The maximum value of Acme Corporation after investment, referred to as the "Post-Money Valuation Cap", is set at $10,000,000. For more specific definitions related to this, Section 2 of the document should be checked.
If Acme Corporation decides to raise more money through selling shares before the end of this current agreement with CashCowVC, this agreement will automatically change. It will turn into either: (1) the number of preferred shares that equals the original investment divided by the cheapest price per share of the same preferred shares; or (2) the next part of the agreement that isn't mentioned here will give the details.
Acme Corporation will give CashCowVC a certain number of Safe Preferred Stock. This number is figured out by dividing the amount CashCowVC is paying (Purchase Amount) by the price of each stock (Safe Price).
When the Safe automatically turns into shares of Standard Preferred Stock or Safe Preferred Stock, CashCowVC must sign and give all related documents to Acme Corporation. These documents must be the same as those given to buyers of Standard Preferred Stock, with some changes if they relate to Safe Preferred Stock. There should also be usual exceptions to any drag-along that applies to CashCowVC, like limited guarantees, promises, and responsibility.
The investor, CashCowVC, has responsibilities to compensate or protect the company, Acme Corporation, from financial harm or loss.
Liquidity Event: If a Liquidity Event happens before this agreement ends, CashCowVC (investor) will automatically get a part of the proceeds. This payment will happen immediately before or at the same time as the Liquidity Event. The amount they receive will be either (i) the Purchase Amount or (ii) a sum based on the number of Common Stock shares, calculated by dividing the Purchase Amount by the Liquidity Price.
If Acme Corporation gives its security holders a choice about how and how much they receive in a significant event like a sale or merger, CashCowVC will have the same option. However, CashCowVC can't choose a form of payment that it doesn't qualify for due to certain rules that apply to all security holders of Acme Corporation, or according to any laws.
If Acme Corporation changes ownership in a way that's meant to be tax-free, they have the right to lower the amount of money they need to pay to CashCowVC by a specific amount.
If Acme Corporation decides to restructure in a way that wouldn't require them to pay federal income tax (a tax-free reorganization), they must get approval from their board of directors. Any decrease in the amount due to the investor, CashCowVC, from this restructuring should not lessen the total amount CashCowVC is supposed to receive. This decrease should also be applied equally and proportionally to all parties who have the same rights as CashCowVC under Section 1(d) of the agreement.
If Acme Corporation ends its business before the termination of this agreement, CashCowVC will automatically have the right to receive a part of the money made from the sale of the company's assets. This amount, known as the Cash-Out Amount, should be paid to CashCowVC just before the company is officially dissolved. This payment is subject to the priority order mentioned in Section 1(d) of this agreement.
In case of a major event like selling the company (Liquidity Event) or closing down the business (Dissolution Event), the Safe is planned to function like standard preferred stock. This means that the investor (CashCowVC) will first get back their invested money before the company (Acme Corporation) distributes any remaining amount among the other shareholders.
The investor, CashCowVC, is entitled to receive a certain Cash-Out Amount from Acme Corporation's standard non-participating Preferred Stock. However, this right is secondary to the payment of any outstanding debts, creditor claims, including contractual payment claims, and convertible promissory notes that Acme Corporation has. These payments must be settled first before the investor can receive their Cash-Out Amount.
If the company, Acme Corporation, needs to pay the investor, CashCowVC, and others who hold Safes or Preferred Stock, everyone will receive an equal amount. If there's not enough money to pay everyone in full, they will divide up what's available proportionally.
The money will be shared evenly among CashCowVC and other parties with similar investment agreements or preferred stock, based on the total amount they're supposed to receive. This will happen before any payments are made to common stockholders.
CashCowVC's entitlement to get its Conversion Amount is on the same level as payments for Common Stock and other Safes and/or Preferred Stock who are also getting Conversion Amounts or Proceeds in a similar way. However, it is less important than the payments described in clauses (i) and (ii) above.
Acme Corporation has to pay CashCowVC a certain amount of money during specific events like the company being sold. These payments are known as Cash-Out Amounts or sometimes referred to as liquidation preferences.
The agreement between Acme Corporation and CashCowVC will automatically end when one of two things happen. First option, when Acme Corporation gives CashCowVC shares as a result of automatically changing this agreement under Section 1(a). The second option, when Acme Corporation pays or sets aside money to pay CashCowVC according to Section 1(b) or Section 1(c). This end does not excuse Acme Corporation from any responsibilities due to previous breaches or non-compliance with this agreement.
This section of the document explains the specific meaning of certain terms used in the agreement. For example, it will clarify what is meant by words or phrases like 'Acme Corporation' or 'CashCowVC'. This is done to avoid any misunderstandings or confusion later on.
"Capital Stock" refers to all types of shares that Acme Corporation owns, which includes both "Common Stock" and "Preferred Stock".
"Change of Control" refers to a situation where a person or group gains ownership of the Acme Corporation, either directly or indirectly. This person or group could gain control through a single transaction or a series of related transactions. The terms 'person', 'group', and 'beneficial owner' are defined under specific sections and rules of the Securities Exchange Act of 1934.
This text refers to three potential major changes involving Acme Corporation. First, it discusses the possibility of someone obtaining over 50% of the company's voting shares, which would give them the power to influence who sits on the company's board. Second, it mentions the possibility of a reorganization, merger, or consolidation of the company, but only if the existing shareholders retain the majority of voting power. Lastly, it refers to the possibility of Acme Corporation selling, leasing, or otherwise transferring nearly all of its assets.
The things that the Acme Corporation owns.
"Company Capitalization" refers to the total value of Acme Corporation, which is determined just before the Equity Financing. This value is calculated based on the total number of common shares that would exist if all other types of shares were converted to common shares, ensuring that no share is counted twice.
This section refers to everything Acme Corporation owns. It includes all the shares of the company that have been given out, all securities that can be converted into other types of securities, and all the options that the company has issued and promised to issue. It's like taking into account every piece of the company that can be owned or turned into ownership.
The text refers to the Unissued Option Pool, which includes all the stock options not yet given to employees. If Acme Corporation decides to grow this pool as part of the equity financing deal with CashCowVC, only the number of promised options that are more than the existing pool before the increase, will be included.
"Converting Securities" refers to this Safe, along with other securities that the company, Acme Corporation, can change into a different form. This includes other Safes, promissory notes that can be converted, and other types of convertible debt instruments.
Acme Corporation has certain types of investments, known as convertible securities, that CashCowVC can change into shares of the company's capital stock if they choose to do so.
"Direct Listing" refers to the first time Acme Corporation offers its common stock (except those that cannot be resold under Rule 144 of the Securities Act) on a national securities exchange. This is done through filing a Form S-1 registration statement with the SEC that allows the resale of the company's existing shares. This process has to be approved by the company's board of directors. It's important to know that a Direct Listing does not count as an underwritten offering and there will be no underwriting services involved.
"Dissolution Event" refers to when Acme Corporation decides to stop its business operations, assigns its assets to pay off its creditors, or undergoes any form of closure or wind-up process. However, this does not include a 'Liquidity Event', which is a separate condition. This can happen on Acme Corporation's own accord or be forced upon them.
The term "Dividend Amount" is used to refer to the money a company, in this case Acme Corporation, pays out as dividends on each share of its common stock. The amount is calculated by taking the dividend per share and multiplying it by the Purchase Amount, then dividing that by the Liquidity Price. This calculation is done every time dividends are paid, treating the payment date as a special event only for this calculation.
The term "Liquidity Price" refers to the value of a company's shares during a liquidity event such as the sale of the company, an Initial Public Offering (IPO), or any other event where the shares can be easily converted to cash. For instance, if Acme Corporation decides to sell the company or go public, the Liquidity Price is the value of each share of Acme Corporation at that specific time. CashCowVC will consider this price when deciding how much they could potentially earn from their investment.
"Equity Financing" refers to a real deal or multiple deals where Acme Corporation's main goal is to raise money. In these deals, Acme Corporation sells Preferred Stock at a set value, which can be determined before or after the money is raised. This includes any similar transactions.
"Initial Public Offering" refers to the completion of Acme Corporation's first solid agreement for an initial public offering, where the company's shares are sold to the public for the first time.
Acme Corporation is selling shares of its common stock. This sale is being done following the guidelines of a document that has been filed under the Securities Act.
The value of Acme Corporation (also known as "Liquidity Capitalization") will be determined just before the Liquidity Event. This is done without counting anything twice and is calculated based on the worth of the Common Stock of the company.
The text discusses the various types of shares involved in a financial transaction between Acme Corporation and CashCowVC. This includes all shares of capital stock that have been issued and are currently outstanding. It also includes all issued and outstanding options, and promised options that are expected to receive proceeds. The text further includes all converting securities except for any Safes and other securities that can be converted (like preferred stock), where the holders are receiving cash payments or similar payments instead of the amounts they would get if the securities were converted.
The company, Acme Corporation, will share its financial information with the investor, CashCowVC, every month. The investor will also get a report every year that shows how well the company is doing. The investor has the right to sell their shares if they want to, but they need to let the company know first. If the company or other investors want to buy those shares, they can do so at a lower price. However, the shares that have not yet been issued as options are not included in this arrangement.
A "Liquidity Event" refers to a situation where either Acme Corporation changes ownership (Change of Control), becomes publicly traded through a direct listing (Direct Listing), or offers its shares to the public for the first time (Initial Public Offering).
The term "Liquidity Price" refers to the cost of each share. This price is determined by dividing the total value of Acme Corporation after investment (Post-Money Valuation Cap) by the total number of shares available (Liquidity Capitalization).
"Options" refers to various types of securities that Acme Corporation may offer to CashCowVC. These can include options, stock awards or purchases that have certain restrictions, RSUs, SARs, warrants, or similar financial instruments. It doesn't matter whether these securities have vested (become available for sale) or not.
"Proceeds" refers to the money and other assets (including stock options) that come from either the Liquidity Event or Dissolution Event, as relevant, and can be legally distributed.
"Promised Options" refers to options that have been promised but not yet given. These options are either those promised in agreements before or during the drafting of the term sheet or letter of intent for the Equity Financing or Liquidity Event. The promised options considered are whichever number is greater.
If Acme Corporation decides to sell (Liquidity Event), the value of outstanding options (choices to buy shares later) will be considered in two ways. Firstly, if there's no initial agreement (term sheet or letter of intent), and secondly, when calculating how much money gets distributed from the sale (Proceeds). If Acme Corporation opts for an Equity Financing (raising money by selling more shares), again, the value of these outstanding options will be factored into the price per share of the Preferred Stock.
"Safe" refers to a document that gives investors, like CashCowVC, the chance to get company shares, like those of Acme Corporation, in the future. This document is used by investors to put money into the company's business operations. When the text says "this Safe," it's talking about this specific document.
"Safe Preferred Stock" refers to a specific type of stock that Acme Corporation gives to CashCowVC when there's an Equity Financing. This stock is the same as Standard Preferred Stock in terms of rights, benefits, rank, and restrictions. However, certain financial aspects like the liquidation value, conversion start price, and dividend per share will be based on the Safe Price.
The "Safe Price" is the value of each share which is worked out by dividing the total worth of the company (known as the Post-Money Valuation Cap) by the number of shares in the company.
The document discusses how the company, Acme Corporation, and the investor, CashCowVC, share ownership. It details the process of determining the value of the company and how shares are divided between them.
"Standard Preferred Stock" refers to the special shares given to those who put new money into the Acme Corporation during the first part of the Equity Financing. These investors, such as CashCowVC, get these shares because they are providing new funds to the company.
The "Unissued Option Pool" refers to all the shares that Acme Corporation has set aside, which can be granted in the future and are not currently tied to any existing or promised options under any of the company's incentive plans. However, in the event of a Liquidity Event, only those promised options that can generate proceeds are considered in this pool.
This section outlines the promises made by Acme Corporation to CashCowVC.
Acme Corporation was properly set up, and exists legally under the laws of its state. It has the necessary rights to own, rent and manage its properties, and conduct its business as it is currently doing.
Acme Corporation has the authority to carry out the actions stated in this agreement and has gone through all the necessary steps to make it valid. This agreement is a legal responsibility of Acme Corporation and can be enforced against them, unless there are bankruptcy or insolvency issues. As far as Acme Corporation is aware, they are not breaking any rules in their own corporation, any important laws, or any significant debts or contracts that they're part of.
If Acme Corporation breaks rules or fails to meet requirements in a way that, alone or with other rule breaks or failures, could seriously harm the company, it would be considered a significant negative impact.
The actions that Acme Corporation is carrying out based on this agreement won't:
(i) break any significant laws, rules or regulations that apply to the company;
(ii) cause any significant debt or contract that the company is involved in to speed up;
(iii) lead to a claim being made on any of the company's property, assets or income, or cause any significant licenses or permissions that the company has to be taken away, lost, or not renewed.
The company, Acme Corporation, has all the necessary approvals, licenses, or permissions required to run its business and operations.
In order to fulfill the terms of this Safe, Acme Corporation doesn't need any permissions or approvals except for the following: (i) approvals within the company itself, (ii) any qualifications or filings under laws related to securities, and (iii) necessary approvals within the company for the authorization of Capital Stock that can be issued according to Section 1.
Acme Corporation claims to have enough legal access to all necessary patents, trademarks, names, copyrights, trade secrets, licenses, and information. If it doesn't own these, it can get them under reasonable conditions.
Acme Corporation owns all the necessary intellectual property (like patents or trademarks) for running its business as it is currently and as it plans to in the future. This ownership doesn't cause any conflict or infringe on the rights of others.
The investor, CashCowVC, promises certain things. These are called 'investor representations'.
The investor, CashCowVC, has all the necessary rights and abilities to agree to and carry out the responsibilities outlined in this agreement. This agreement is considered a legitimate commitment from CashCowVC, and can be enforced as per its terms.
The agreement's conditions apply fully unless they are restricted by laws related to bankruptcy, insolvency, or other general laws that impact the ability to enforce the rights of creditors. Also, general fairness principles can affect the agreement.
The investor, CashCowVC, is acknowledged as an accredited investor, meaning they meet certain requirements set by financial regulations. CashCowVC understands that if they lose this status when an Equity Financing occurs, Acme Corporation can nullify this agreement and return the money. They have been informed that this agreement and the securities it relates to are not officially registered under financial laws.
The shares bought by CashCowVC from Acme Corporation cannot be sold again unless they follow certain rules set by the Securities Act and state laws. These rules can be bypassed if there is a special exception. CashCowVC is buying these shares for itself, not for someone else, and doesn't plan to sell them or share them with others. CashCowVC understands the financial and business aspects of this purchase and is ready to deal with any potential loss without it affecting their financial situation. They are also prepared to handle any financial risks that come with this investment.
The phrase 'an indefinite period of time' means that there is no specific end date set.
This section deals with various other matters.
Any part of this agreement can be changed, but only if Acme Corporation and CashCowVC agree in writing. Alternatively, if a majority of other investors with the same deal terms agree to the changes, they can also be made. Deals that don't specify the value cap or discount rate are considered the same for this purpose.
The company, Acme Corporation, has the ability to change certain terms, but there are restrictions. They cannot change the Purchase Amount. They must ask for permission from the investor, CashCowVC, and anyone else who holds Safes, even if they don't get it. And any changes made must be fair and identical for all Safe holders. The term "Majority-in interest" means those who hold Safes that amount to more than half of the total Purchase Amount of all Safes in that group.
If Acme Corporation or CashCowVC need to send any important messages related to this agreement, it is considered acceptable and enough if done personally or through registered mail.
If Acme Corporation or CashCowVC need to send any important messages to each other, they can do so by overnight courier or email to the addresses listed on the signature page of their agreement. Or, they can send it through the U.S. mail as certified or registered mail with postage already paid. It will be considered delivered 48 hours after it is mailed. The address to send these messages is also on the signature page of their agreement, but if either Acme Corporation or CashCowVC change their address, they must let the other party know in writing.
CashCowVC, as the holder of this Safe, doesn't have the right to vote or be considered a holder of Acme Corporation's Capital Stock for any other purpose except for tax reasons. Nothing in this Safe gives CashCowVC the rights of a stockholder in Acme Corporation, or the right to vote for director elections or on any matter brought to the company's stockholders.
Acme Corporation cannot make any corporate decisions or receive meeting notices until shares have been issued as per Section 1. If Acme Corporation decides to pay a dividend on existing common stock, CashCowVC's rights can change.
If Acme Corporation decides to pay out any dividends (not in the form of Common Stock) while this agreement is still in effect, CashCowVC will receive a similar dividend payment at the same time.
Neither Acme Corporation nor CashCowVC can transfer or assign their rights in this Safe agreement to anyone else without the other's written approval. However, CashCowVC is allowed to transfer its rights without needing Acme Corporation's approval to its estate, heirs, or those managing its affairs after death.
If the investor passes away or becomes disabled, their guardians or successors can step in. Also, any organization that has control over, is controlled by, or is under the same control as the investor can step in. This includes key figures like general partners, managing members, officers, or directors of the investor, as well as any venture capital fund that shares the same management or is controlled by the partners or managing members of the investor.
If any part of this agreement between Acme Corporation and CashCowVC is deemed unlawful or cannot be enforced for any reason, it doesn't affect the rest of the agreement. The remaining parts still hold.
If any part or whole of this agreement between Acme Corporation and CashCowVC is found to be unenforceable or could potentially make the agreement invalid, only that specific part will be considered null and void. The rest of the agreement will still be operative, fully effective and won't be influenced or disrupted by this.
Any rights and duties Acme Corporation and CashCowVC have under this agreement will follow the laws of the specified state. This will happen even if those laws are different from the laws where Acme Corporation or CashCowVC are located or operate.
Acme Corporation and CashCowVC both understand and agree that this Safe (a kind of investment) is considered as common stock for the purpose of several sections of the Internal Revenue Code of 1986. Therefore, both parties will handle this Safe as if it were common stock for all federal and state income tax purposes. This includes how they report it on their tax returns or any other tax-related documents.