SAFEs and Convertible Instruments
SAFEs and convertible notes let start-ups raise money quickly by postponing the valuation discussion. But because these instruments, widespread in the US, are not directly regulated under Turkish law, they need to be structured so that they fit Turkish company law and can actually be enforced. We draft and structure SAFEs, convertible notes and similar instruments to suit your start-up’s structure.
What is a SAFE?
A SAFE (Simple Agreement for Future Equity) is a contract under which the investor, in return for the amount paid today, is entitled to receive shares in the company in a future funding round. No valuation is set at the time of investment; the investor’s shares are calculated on the valuation of the next round, usually with a valuation cap and a discount rate.
A convertible note, by contrast, starts as debt; it converts into shares if it is not repaid by its maturity date or if a funding round takes place. Bearing interest and having a maturity are its main differences from a SAFE.
How does a SAFE work under Turkish law?
Under Turkish law, conversion into shares is possible only through a capital increase and a general assembly resolution; the company cannot, on its own, commit to issuing shares in the future. A SAFE is therefore structured as an agreement in which the founders undertake to vote in favour of the capital increase and the restriction of pre-emption rights at the time of conversion.
Because share transfers and capital increases in limited liability companies are subject to stricter rules, these instruments are usually preferred in joint stock companies. How the amount invested will be recorded in the company’s books should be decided together with the financial adviser.
Scope
- Drafting and structuring SAFEs, convertible notes and similar investment instruments
- Structuring the valuation cap, discount rate and conversion terms
- Carrying out the capital increase and registration at the time of conversion
- Adapting foreign standard SAFE templates to Turkish law
How We Work
- Assessing the start-up’s structure, the current shareholding and the investor’s expectations
- Choosing the instrument: SAFE, convertible note or a direct capital increase
- Setting the conversion terms, valuation cap and discount rate
- Drafting the agreement and the founders’ undertakings
- When conversion is triggered, general assembly resolutions, capital increase and registration
Team
Frequently Asked Questions
Does a SAFE investor become a shareholder?
When the SAFE is signed, the investor is not yet a shareholder; they become one on conversion in the next funding round or on another event specified in the agreement. The agreement sets out which rights, such as information rights, the investor has in the meantime.
What is a valuation cap?
The valuation cap is the maximum company valuation used when the SAFE converts into shares. If the next round is priced above the cap, the SAFE investor receives shares at the cap valuation, that is, at a more favourable price. This rewards the investor who took early risk.
What happens if no new round ever takes place?
The SAFE should also cover this possibility: on a sale of the company, its liquidation or the expiry of a certain period, the investor may be entitled either to conversion into shares or to repayment of the amount invested. Failing to set out these scenarios clearly is the most common cause of disputes.
Can we use the standard US SAFE as it is?
It is not recommended. The standard text is written for Delaware company law and does not meet the rules of Turkish company law on capital increases, pre-emption rights and registration. The text should be adapted to Turkish law and backed by founder undertakings that secure the conversion.
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