When running a startup, one of your first and arguably most important considerations is how you will fund your business. After all, you need money in the early stages to help bring your vision to life.
For startups, it’s common to get the help of investors. However, like many other business arrangements, you’ll need to get these in writing.
There are many ways that investors can invest in your business and secure the details of your business relationship. In this article, we’ll focus on two popular methods:
While the two are similar, there are key differences that can help you determine which is better (and safer!) for your startup.
Keep reading to learn more about whether a SAFE Note or ASA is better for you.
How Do Startups Get Funding?
Before we get into the nitty gritty details of SAFE Notes and ASAs, it’s worth understanding why they’re needed in the first place.
Investors invest money into startups all the time, but in some cases, startups may wish to do so in a way that is more financially secure for them. This is where SAFE Notes and ASAs come into play.
SAFE Notes and ASAs are common ways to document the details of an arrangement with an investor. These are usually required because unlike a regular arrangement with an investor, a SAFE Note and ASA involves investment being converted at a later date.
Often, this requires a ‘trigger’ event to occur before the investor can receive shares. Let’s discuss how this works in more detail.
What Is A SAFE Note?
A SAFE Note stands for a Simple Agreement for Future Equity. If an investor chooses to invest cash in a startup under a SAFE Note, this means they provide the funds now, but will not receive the actual shares until a future date, or a future priced round.
This is often seen as an attractive option for startups because it is not debt, and therefore does not have interest.
As such, it allows the startup to use the funds to hit the ground running and worry about the details of allocating shares to investors later on.
The SAFE Note should include key details, such as:
- When the investor actually gets the shares
- How shares will be allocated
- What constitutes a ‘trigger’ or ‘conversion’ event
- How many shares will be given to the relevant investor/s
- Whether an investor is entitled to their money instead of shares
What Is An Advanced Subscription Agreement (ASA)?
An Advanced Subscription Agreement (ASA) is similar to a SAFE Note in that it allows investors to pay for shares that will be allocated later on.
An ASA is a popular option for startups who need money in the early stages as there is little negotiation required. It’s often seen as a quick solution for startups to get things running.
For investors, the shares are offered at a discount which makes it an attractive option.
Under an ASA, there is no interest and an investor cannot get their money back. This is so that the agreement can qualify for SEIS/EIS tax reliefs.
Under both ASAs and SAFE Notes, shares are still being issued to investors. As such, both agreements should set out details around issuing shares. For example, consider the following:
- How will shares be valued?
- When will shares be converted?
- How will shares be issued?
- Do pre-emption rights apply?
Which One Is Better For My Startup?
While both ASAs and SAFE Notes are attractive options for startups and investors alike, the key differences between the two can mean that one is more suitable than the other.
It all comes down to the circumstances of your business and what your preferences are.
Why Should I Have A SAFE Note?
A SAFE Note is beneficial for many reasons, the main reason being that it is more simple than a convertible note.
Like we mentioned before, a SAFE Note is not a loan and therefore does not accrue interest. This removes some financial burden from your startup.
Furthermore, a SAFE Note allows you to receive the required funding for your startup in the early stages, and allows you to sort out your share allocation later down the track. This way, you can focus on one thing at a time rather than stressing about both at once.
SAFE Notes are quite flexible as well, as the date of conversion is not predetermined. This flexibility is enhanced even more if you choose to negotiate certain terms of the agreement.
Why Should I Have An Advanced Subscription Agreement?
While a SAFE Note is popular, some startups and investors prefer an Advanced Subscription Agreement (ASA). Why?
An ASA can be seen as more specific and secure than a SAFE Note because it sets out the number of shares and the particular price that is being offered. As such, it may have less room for negotiation and flexibility.
However, like we mentioned, it really depends on what you prefer – flexibility or certainty.
ASAs are also popular among startups who want to keep arrangements with their investors on the down-low.
Need A Startup Lawyer?
Whether you want to draft a SAFE Note or an ASA, it’s always wise to speak to a lawyer with experience working with startups. At Sprintlaw, we have expert startup lawyers who are ready to chat you through your options and draft the legal documents you may need.
If you would like a consultation on your options moving forward, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.
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