When entering into a Simple Agreement for Future Equity (SAFE) with a lead investor, it is common or sometime requested by the investor, for additional rights to be secured through a side agreement. These side letters ensure that the lead investor has certain privileges and protections. In this article, we will explore the rights typically included in SAFE side agreements and important considerations to keep in mind.
Preemptive Rights for Future Financing
One of the key rights granted in a side letter is the preemptive right to participate in the next financing round. This gives the lead investor the opportunity to maintain their ownership percentage by purchasing additional shares before they are offered to other investors. Preemptive rights are calculated on a deemed conversion basis, taking into account previous issuances of stock to the investor and the conversion of other safes and Convertible Loan Agreements (CLAs).
Information Rights
Side agreements often include information rights, which allow the lead investor to stay informed about the company’s progress. These rights may involve receiving financial statements, quarterly or monthly updates, and other relevant reports. It is important to note that information rights may be time-limited until the conversion of the SAFE. After conversion, the investor must meet certain holding percentage or threshold requirements outlined in the company’s corporate documents to retain these rights.
Access or Inspection Rights
In addition to information rights, lead investors may seek access or inspection rights to visit the company’s offices and engage in discussions with management. These rights enable the investor to assess the company’s operations firsthand and contribute valuable insights. Similar to information rights, inspection rights may be time-limited until the conversion of the SAFE. After conversion, meeting specific holding percentage or threshold requirements becomes necessary to retain these rights.
What to Be Aware of?
It is crucial to be aware of certain considerations when it comes to side letters for SAFE agreements:
(a) Limited Future Participation/Preemptive Rights:
Future participation or preemptive rights are typically limited to meeting specific holding percentage or other thresholds defined in the company’s corporate documents. These thresholds are often referred to as “qualified investor” or “major investor” qualifiers. This limitation ensures that excess rights are granted only to investors who meet the predetermined criteria.
(b) Time Limitations for Information and Inspection Rights:
Information and inspection rights granted through side agreements may expire upon the conversion of the SAFE. To continue enjoying these rights, the investor must meet the holding percentage or other threshold requirements specified in the company’s corporate documents. This provision ensures that ongoing privileges are extended only to qualified investors or major investors.
Conclusion
SAFE side letters play a vital role in securing additional rights for lead investors while maintaining fairness and equality among stakeholders. Preemptive rights, information rights, and access/inspection rights are commonly included in these agreements. However, it is important to be aware of the limitations associated with future participation, as well as the time-limited nature of information and inspection rights. By understanding these aspects, both investors and companies can establish a balanced and transparent framework for their SAFE agreements.
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