SAFE in Switzerland: Simple Agreements for Future Equity (SAFE) in Swiss Startup Financing

Introduction

In the United States, the Simple Agreement for Future Equity (SAFE) has become a staple in early-stage financing of startups, increasingly replacing the traditionally used convertible loan agreement. Originally conceptualized in 2013 by Y Combinator[1], a startup accelerator and incubator based in Mountain View, California, SAFEs have been designed with the goal to simplify and accelerate the investment process for early-stage investments into startups while also reducing consultants’ fees.

Stakeholders in Swiss startups, particularly when engaging with international investors, have recognized the advantages of SAFEs. Given that the standard template is not specifically tailored to Swiss regulations, both investors and startup companies should be aware of the unique legal requirements and nuances in Switzerland.

Understanding SAFEs

A SAFE is a financing tool for startups, providing investors with future equity rights but not an immediate equity stake. The conversion into equity is contingent on the next equity funding round. Alternatively, in the event of a liquidity event (change of control, direct listing, or IPO) a certain amount of the proceeds (cash or other assets) of the liquidity event may be paid out to the investor.

SAFEs do not have a set share price at the time of investment, a maturity date, arepayment claim, and they do not bear interest. The conversion terms, often involving valuation caps and/or discounts, determine the amount of equity received during the financing round. While the converted SAFE preferred shares are equal to the preferred shares of the financing round, any price-based preferences will be based on the SAFE/discount price, which is determined by the cap dividedby the capitalization of the company immediately prior (and not including) the financing round or the price per share determined by the discount.

Variants of SAFEs

Y Combinator provides different templates, each with its own characteristics:

Pre-Money Valuation Cap SAFE: In the original SAFE from 2013, thec onversion price is capped. If a future funding round values the company higher than this cap, the SAFE investor benefits by converting at the capped, lower valuation, thus obtaining a greater share of equity. The pre-money valuation means that other SAFEs were not included in the valuation. Therefore, SAFEs were diluted by other different SAFEs as well. For this reason, this variant is no longer offered by Y Combinator.

Post-Money Valuation Cap SAFE[2]: This version was introduced by Y Combinator in 2018 and has replaced the Pre-Money Valuation Cap variant. It is today used as the standard for most financings through SAFEs. The equity conversion calculation is based on the company’s valuation after considering the money raised by all other SAFEs. The SAFEs themselves do not dilute each other. They are treated like their own financing round. The investor can be more certain about what their share in the company will be. While the equity stake of the SAFE investors still gets diluted by the shares of the investors of the priced equity round, the range of dilution is clearer in the case of a Post-Money Valuation Cap.

SAFE with Discount[3]: This variant grants the SAFE investor a discount on the share price in the next funding round.

Combination of Cap and Discount: This variant merges both the Cap and Discount, allowing the investor to benefit from the better valuation between the capped conversion price and the discounted share price. It is no longer offered by Y Combinator but old versions can still be found online.[4]

Most Favored Nations (MFN)[5]: If a SAFE is equipped with an MFN-clause, the SAFE investor has the choice to accept the conditions of any subsequent SAFEs.

Comparing SAFEs with Convertible Loans

While both SAFEs and convertible loans are startup financing instruments that involve future equity rights, there are differences. A convertible loan is a category of financial instrument and comes in many different forms. The SAFE on the other hand is a specific template that, in theory, should not be altered. Convertible loans are a form of debt and typically accrue interest. The convertible loan agreement has a maturity date, and the grantor of the loan has the right to choose between repayment of the loan or conversion into equity. The SAFE does not bear interest or grant a repayment claim. It also lacks a maturity date.The conversion is tied to a future financing round. It is structured as an equity investment and not as a loan. Hence, SAFEs generally are considered tooffer startups more flexibility and control compared to convertible loans.

Swiss Law Considerations

The Swiss Code of Obligations requires specific attention to the legal structure and terms of SAFEs, especially regarding equity issuance and shareholders’ rights. Since the SAFE instrument was constructed under US corporate law, it does not consider the specifics of Swiss corporate law. In particular, the SAFE investment is meant to be an equity investment. In practice, due to the specifics of Swiss corporate, tax, and accounting laws, pursuing a SAFE as an equity investment might not be the most recommended approach in Switzerland. Opting for a SAFE structured as a convertible loan could, however, present a compelling alternative.

While under Delaware and California law the board of directors typically will have the right to issue a certain pre-authorized amount of new shares, this right is reserved under Swiss law to the shareholders’ meeting. In Switzerland, the shares would be issued by capital increase, based on a resolution passed in the shareholders’ meeting. While it is possible to have a certain amount pre-approved by the shareholders’ meeting or contingent on the exercise of a conversion right, the implementation is far less flexible than in the US and in practice does not make it a feasible solution in Switzerland. The most practical route is to resolve an ordinary capital increase in a future shareholders’ meeting, in particular, the one for the resolution of the capital increase to accommodate the priced financing round.

Asthe shareholders have the final decision on the capital increase, the SAFEinvestor should contractually make sure that the current shareholders undertaketo approve the capital increase.

Since the SAFE investors are not shareholders at the time of payment, the investment amount cannot be classified as an equity contribution. The payment must be recorded as affecting profits, potentially leading to undesirable tax consequence, that the company generates profits from the investment into the company.

As an alternative, the SAFE should be treated as a convertible loan. Given that startups usually spend the invested funds without generating revenues initially, a clause should be added to the SAFE to subordinate the repayment claims of the SAFE investor, thereby preventing the risk of over-indebtedness.

Further, the applicable law and the place of jurisdiction of the SAFE should be changed to Switzerland.

Download our Swiss Simple Agreement for Future Equity (SSAFE) that reflects all these modifications below.

Benefits for Swiss Startups

A SAFE, interpreted as a debt instrument, could still bring benefits in comparison to a convertible loan. Although this approach may diverge from the original intentions of the creators, it could potentially establish a compromise that benefits both the investor and the company. As displayed above, certain sections need be added to reflect local laws clearly. The added clauses can be easily identified in a markup. An investor familiar with SAFEs might reach a quicker decision than when dealing with an unknown convertible loan agreement. The same would apply to the company and as a result might lead to a faster investment process.

Conclusion

A SAFE in its original form is not recommended for a Swiss company. Swiss corporate law is not flexible enough to accommodate the SAFE as an equity investment in a beneficial way.

The re-interpretation of the instrument from an equity investment into a debt investment could makeit a viable option. A tailored Swiss version of SAFEs can offer advantages insimplicity and efficiency over conventional convertible loans, making them an attractive option for both investors and Swiss startups.

Introducing the SSAFE (Swiss Simple Agreement forFuture Equity): A version of the post-money valuation cap SAFE, modified to suit the requirements of Swiss law.