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Simple Agreements for Future Equity (SAFEs) / Convertible Loan Agreements (CLAs)

05/04/2022

The simple and efficient means for startups to raise funding in Switzerland

As a business having received funding commitments, it would be a pity to lose momentum or even your investors’ interest because the legal process drags on or is unclear. This blog post aims to show you that “drawing up the paperwork” doesn’t need to be a lengthy or complicated process.

On the way to their stellar success and the ensuing M&A exit or even initial public offering (IPO), startups and scaleups routinely raise money. Traditionally, money is raised in the form of equity financing rounds, whereby your company increases its share capital and allocates new shares to the investor(s). However, there may be investors willing to invest quickly and receive equity in your company later. In that case, concluding a SAFE can be an easy and quick way to receive the committed funding in a matter of days and to everyone’s satisfaction. SAFEs are a well-known instrument of investors in many jurisdictions, starting with the United States, where they are very popular.

What is a Safe, and how does it work?

In economic terms, a SAFE is a contract by which investors pay a company in consideration for equity (i.e. shares) to be received later, upon specific triggers determined in the agreement.

Under Swiss law, the SAFE is qualified as a “convertible loan”. The company receives a loan and repays this loan at a later date by transferring shares, i.e. the loan is set off against shares. For this reason, in Switzerland, the terms are interchangeable and refer to the same instrument.

The cornerstone variables of a SAFE, which are the main points to be decided between its parties, are the following:

  • Investment Amount: How much money you’ll receive from the investor
  • Trigger Events: These events will trigger the conversion (or the transfer of shares to the investor). Market standard trigger events are:
    • A qualified equity financing round, i.e. the next round where the company raises significant funding from other investors in the form of a capital raise and immediate assignment of new shares in consideration for the investment;
    • A liquidity event such as the private sale of the company through an M&A exit or an initial public offering (IPO) of its shares;
    • A maturity date: this is a date chosen by the parties on which the SAFE will convert automatically, should no other trigger have occurred yet.
  • Valuations and discounts: The number of shares that the investor receives in consideration for its investment is calculated based on a specific valuation of the company (and therefore of each of its shares). The appropriate valuation depends on the event that triggered a conversion:
    • In the case of a qualified equity financing round or liquidity event, the parties typically use the same valuation applied to the investors or purchasers of the trigger event. However:
      • the risk taken by the SAFE investor (who invested earlier) is remunerated by a discount rate, which usually varies between 10 and 25% (i.e. the investor receives a lower share price and therefore more shares for the money);
      • a valuation cap is often negotiated to ensure the SAFE investor receives a minimum equity stake in the company.
    • A specific maturity valuation is often set, which defines in advance the equity received by the investor in case the SAFE converts at the maturity date.
  • Interest: Given that the SAFE is a form of loan, the parties can additionally remunerate it with yearly interests that are typically served in the form of equity at conversion. This can, for example, be used as an incentive for the investor to accept a lower conversion rate.
  • Option to reimburse in cash: though this option is rarely included in SAFEs, the company (or even more seldom the investor) could reserve the right for the investment amount to be reimbursed in cash rather than equity.

Can or should we use the “YCombinator”?

As the SAFE is a well-known instrument, organizations in certain jurisdictions have published template agreements that have become benchmarks. The classic example of this is the YCombinator template published by its namesake American technology startup accelerator. Often, investors suggest using this document to expedite the process even more by using a document they know and trust. Perhaps you were even advised to use this to minimize costs and ensure that the transaction is set on benchmark terms.

YCombinator and other foreign benchmark templates need some significant adaptations to function under Swiss law in the context of the investment in a Swiss target. This is easy to achieve, and the resulting contract will be materially very similar to the YCombinator, but its mechanisms have to be substantially altered to account for the Swiss specificities of your company. Using adapted foreign benchmarks will often give your investors a false sense of comfort and safety. Therefore, your investors should still take good care to assess and understand the final agreement and its deviations from the original template.

On the other hand, your Swiss setup offers significant advantages that you should fully utilize. Namely;

  • Swiss law generally allows for much simpler and shorter contractual documentation than what is typically seen in Anglo-Saxon jurisdictions
  • This is true namely for Swiss market standard SAFEs, which can be as short as a couple of pages and use understandable language, in a clear and streamlined structure
  • Such a SAFE can be drafted, negotiated, and signed in as little as a couple of days, even if the parties are unfamiliar with the documentation.

Key takeaways

You’re probably very busy, so the TLDR points are the following:

  • SAFEs allow your startup to push investments through in a matter of days and are therefore an excellent instrument for dynamic high-growth startups.
  • The key variables that you can directly discuss with your investors are relatively simple and outlined above.
  • We strongly encourage using simple native Swiss contractual documentation whenever possible, rather than adapted foreign benchmark contracts (YCombinator or other), which are indeed a false shortcut.

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