Will SAFE replace convertible notes?
Y Combinator, a well-known fund that uses the accelerator model, offers The safe (simple agreement for future equity) a financing agreement in exchange for a share in the company. The essence of the undertaking is the standardization of procedures, primarily financing, ease of management. It is logical that safe was born in the accelerator.
Y Combinator declares that safe is both simpler and more transparent, and also more fair (compared to a convertible note) for both investors and founders of startups.
What is this simplicity and justice? In that safe is not a debt instrument, that is, there is no payment term (debt repayment), the tool is not limited to special regulation, does not create a bankruptcy threat for a startup, does not entail interest accrual, and does not impose subordination agreements (subordination).
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The absence of interest is emphasized. Of course, the interest of the investor is not interested. The goal of the investor, first of all, is a completely different yield than debt can provide. Also, the absence of interest is certainly an advantage for founders. In addition, the agreement is indefinite and terminates upon the occurrence of certain conditions.
Then the investor gets a stake in the company or money.
What are these conditions? These conditions are described in the agreement: Equity Financing - the next round of financing, Liquidity Event - change of control in the company or IPO, Dissolution Event - termination of the company, including bankruptcy.
In Russian legislation, such relations are governed by civil law and, above all, article 157 of the Civil Code of the Russian Federation.
In accordance with this article, if the parties have made the emergence of rights and obligations dependent on a circumstance with respect to which it is not known, whether it will come or not, the transaction is considered to be completed under a suspensive condition.
From the moment of the conclusion of such a transaction, the parties immediately enter into legal relations that are the purpose of the agreement, and from that moment no arbitrary derogation from the agreement is allowed.
If the onset of the condition was unfairly prevented by the party to whom it is unprofitable, then the condition is recognized as BURIED. And, on the contrary, if the offensive was promoted by the party to whom it is profitable, then the condition is recognized not to be committed (article 157 of the Civil Code of the Russian Federation).
Upon the occurrence of a suspensive condition, the transaction in whose content it is included, without any additional legal facts, gives rise to those rights and obligations whose occurrence was made dependent on the occurrence of the condition.
Therefore, a transaction concluded under a suspensive condition must be distinguished from a preliminary contract.
Thus, Article 429 of the Civil Code of the Russian Federation establishes that, according to a preliminary contract, the parties undertake to enter into a future contract (main contract), for example, on the transfer of property, under the conditions stipulated by the preliminary contract.
An important difference between a preliminary contract and a transaction concluded under a suspensive condition is that it is only possible to compel a party who fails to conclude an agreement by appealing to the court with the requirement of forcing a contract to be concluded.
That is, in its meaning, the relationship applied to a transaction made under a suspensive condition corresponds more closely to the relationship between the investor and the founder of the startup. In case of non-fulfillment of obligations by an entrepreneur, the investor will demand in court not to conclude a contract, but to immediately transfer to him a share in the company.
We must admit that it is possible that it is easier to repay a debt than to give up a share in a company. This is not a legal question, but a correspondence with the result. To avoid such situations, use such a tool as the assessment limit. (Used also in convertible bonds). The startup assessment limit is a key element of the SAFE agreement.
It should also be borne in mind that the use of such a mechanism in the Russian context may be fraught with the risk that such a model will be considered by law enforcement agencies (courts) as a bet. Requirements related to betting or participation in them are not subject to judicial protection (article 1062 of the Civil Code of the Russian Federation).
Y Combinator declares that safe is both simpler and more transparent, and also more fair (compared to a convertible note) for both investors and founders of startups.
What is this simplicity and justice? In that safe is not a debt instrument, that is, there is no payment term (debt repayment), the tool is not limited to special regulation, does not create a bankruptcy threat for a startup, does not entail interest accrual, and does not impose subordination agreements (subordination).
')
The absence of interest is emphasized. Of course, the interest of the investor is not interested. The goal of the investor, first of all, is a completely different yield than debt can provide. Also, the absence of interest is certainly an advantage for founders. In addition, the agreement is indefinite and terminates upon the occurrence of certain conditions.
Then the investor gets a stake in the company or money.
What are these conditions? These conditions are described in the agreement: Equity Financing - the next round of financing, Liquidity Event - change of control in the company or IPO, Dissolution Event - termination of the company, including bankruptcy.
SAFE in Russian reality
In Russian legislation, such relations are governed by civil law and, above all, article 157 of the Civil Code of the Russian Federation.
In accordance with this article, if the parties have made the emergence of rights and obligations dependent on a circumstance with respect to which it is not known, whether it will come or not, the transaction is considered to be completed under a suspensive condition.
From the moment of the conclusion of such a transaction, the parties immediately enter into legal relations that are the purpose of the agreement, and from that moment no arbitrary derogation from the agreement is allowed.
If the onset of the condition was unfairly prevented by the party to whom it is unprofitable, then the condition is recognized as BURIED. And, on the contrary, if the offensive was promoted by the party to whom it is profitable, then the condition is recognized not to be committed (article 157 of the Civil Code of the Russian Federation).
Upon the occurrence of a suspensive condition, the transaction in whose content it is included, without any additional legal facts, gives rise to those rights and obligations whose occurrence was made dependent on the occurrence of the condition.
Therefore, a transaction concluded under a suspensive condition must be distinguished from a preliminary contract.
Thus, Article 429 of the Civil Code of the Russian Federation establishes that, according to a preliminary contract, the parties undertake to enter into a future contract (main contract), for example, on the transfer of property, under the conditions stipulated by the preliminary contract.
An important difference between a preliminary contract and a transaction concluded under a suspensive condition is that it is only possible to compel a party who fails to conclude an agreement by appealing to the court with the requirement of forcing a contract to be concluded.
That is, in its meaning, the relationship applied to a transaction made under a suspensive condition corresponds more closely to the relationship between the investor and the founder of the startup. In case of non-fulfillment of obligations by an entrepreneur, the investor will demand in court not to conclude a contract, but to immediately transfer to him a share in the company.
We must admit that it is possible that it is easier to repay a debt than to give up a share in a company. This is not a legal question, but a correspondence with the result. To avoid such situations, use such a tool as the assessment limit. (Used also in convertible bonds). The startup assessment limit is a key element of the SAFE agreement.
It should also be borne in mind that the use of such a mechanism in the Russian context may be fraught with the risk that such a model will be considered by law enforcement agencies (courts) as a bet. Requirements related to betting or participation in them are not subject to judicial protection (article 1062 of the Civil Code of the Russian Federation).
Source: https://habr.com/ru/post/208322/
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