Introduction:
The startup ecosystem thrives on innovative financing mechanisms that balance the needs of investors and entrepreneurs. One such instrument that has gained significant traction is the Simple Agreement for Future Equity (SAFE). Originating in the United States, SAFEs have revolutionized early-stage financing by offering a streamlined and flexible alternative to traditional equity investments and convertible notes. This article examines the introduction of SAFE agreements in Armenian legislation, comparing it with the established practices in the United States.
Understanding SAFE Agreements:
A SAFE is an agreement between an investor and a company that provides rights to the investor for future equity in the company, similar to a warrant. The key feature of a SAFE is that it converts into equity upon the occurrence of a specific event, usually a future financing round. Unlike convertible notes, SAFEs do not accrue interest or have a maturity date, making them simpler and more entrepreneur-friendly.
Current situation
The Armenian startup ecosystem has been growing steadily, with increasing interest from both local and international investors. However, Armenian start-ups are frequently forced to relocate their business ideas to other legislations, which provide more flexible and investor friendly environment. The investors are regularly interested in making investment in start-ups using SAFE, which introduces three major features:
1. Conversion Trigger: SAFEs convert into equity upon the occurrence of a specific event, typically a subsequent priced equity financing round;
2. Valuation Cap and Discount: These terms provide a mechanism to set the price at which the SAFE converts into equity, protecting the investor from excessive dilution;
3. No Interest or Maturity Date: Unlike convertible notes, SAFEs do not accrue interest or have a maturity date, reducing the financial burden on the startup.
Introduction of SAFEs in Armenia:
In June 2024 SAFEs were introduced in the legislation of the Republic of Armenia, more specifically in the law on Joint Stock Companies. A major point of the regulation is that SAFE agreements are considered as securities as per legislation of the Republic of Armenia, which consequently shall result in the unified custody of SAFEs. Account operators of the companies shall be deemed to make the record of SAFEs which will ensure that the investors may receive participation in the companies as the result of occurrence of certain events.
In addition pre-emptive rights of shareholders do not apply to SAFEs. The advantage of this option will ensure that new investors shall be required the waiver of pre- emptive rights prior to subscription of the newly issued shares of the companies, where they have invested.
Moreover, SAFEs provide additional attractiveness for the companies, as in general SAFEs are subscribed as interest-free, which does not incur additional expenses in the way of payment of interest for companies, which may be crucial for startups and newly developed companies.
Author:
Aleksandr Egibyan
Senior Associate, Legelata Legal and Tax
DISCLAIMER:
This material is produced by or for Legelata LLC. The information contained in this piece is provided for general informational purposes only and does not contain a comprehensive analysis of each item described. Prior to undertaking (or omitting) any action, the reader is advised to seek professional advice tailored to their specific situation. Neither Legelata nor the author accept and hold liability for acts or omissions taken in reliance upon the contents in this material.
LEGELATA LLC 29/07/2024
