An investor looking to invest in a company may carry out its objective by way of various means, including but not limited to through a simple agreement for future equity ('SAFE'), keep it simple security ('KISS'), convertible note, or equity investment, amongst others. Given that each investment option has various benefits and drawbacks, the suitability of the investment option must be analyzed against the backdrop of the transaction, including but not limited to the stage in the economic cycle of the company, the size of the round, and the value of the investment. In this article, we compare two such investment options, namely investment through a SAFE and equity investment.
Fundraising in the early stages of a company, especially in the Middle East and North Africa region, tend to be accomplished through the issuance of SAFEs, rather than by way of issuing shares to new investors. A SAFE is an investment option for early-stage funding, whereby an investor provides funding to a company in exchange for the right to buy shares upon an equity financing round. The main negotiation points are the investment amount, valuation cap, and discount rate.
The key advantages of SAFE investments include:
The key disadvantages of SAFE investments include:
An investor may also invest in a company in exchange for share subscription in an equity financing round. In an equity round, a valuation of the target company is set, a price per share is determined, and the number of shares to be issued to each investor is calculated based on the investment amount, where the number of investor shares equals the investment amount divided by the price per share.
In an equity financing round, investors obtain a different class of shares, commonly referred to as preferred shares, with certain rights and privileges including but not limited to reserved matters, liquidation preference, anti-dilution protection, drag-along and tag-along rights. The most common transaction documents relevant to an equity investment round are a share subscription agreement and a shareholders' agreement.
The key advantages of equity investments include:
The key disadvantages of equity investments include:
While raising financing through the issuance of SAFEs or issuance of shares are both viable options to consider for both companies and investors, early-stage companies in the region in their pre-seed and seed financing rounds tend to raise capital through SAFEs. Given the lower costs and higher efficiency of raising financing through issuing SAFEs, this option is more favored by companies with a short runway.