incorporation – corporate – funds
Raising funds in Thailand with a SAFE
As an entrepreneur seeking funding in Thailand, there are a variety of term sheet options available, including the SAFE (Simple Agreement for Future Equity). SAFE was originally created by Y Combinator as an alternative to convertible notes, the SAFE maintains the flexibility of a convertible note but addresses many of its problems. It does not collect interest or have a maturity date, instead deferring conversations around valuation, liquidation preference, and participation rights in the next round.
Since its release in 2013, the SAFE has become a popular alternative to convertible notes due to its quick and effective way of raising early capital. Thailand boasts a growing startup scene and companies are always on the lookout for viable fundraising solutions. Therefore, this raises an important question, can we use a SAFE for raising funds in Thailand?
What is a SAFE?
A SAFE is an investment vehicle designed to simplify the early stage funding process and reduce the costs associated with the funding round. SAFEs have been designed to be an alternative to and replace convertible notes.
SAFE does share some similarities with convertible notes, for example, both offer startups a way to achieve the milestones that warrant a Series A round. Also, both options provide a discount on the next round (or current round for convertible notes).
While there are some important similarities, there are also some key differences to consider as well. Firstly, SAFEs are not a debt instrument but a warrant, therefore, they do not carry an interest rate. Convertible notes on the other hand, can carry an interest rate ranging from 2% to 8% (with 5% being the average).
As mentioned above, a SAFE is not considered a debt instrument, this means it doesn’t have a maturity date. Convertible notes on the other hand, do have a maturity date, and this can lead to issues further down the line when the maturity date comes to pass.
Both SAFE and convertible notes allow for a conversion into equity. Convertible notes allow for the conversion to happen in the current round of stock or later in a future financing event. SAFE is more limited as it only allows for a conversion to equity to happen in the next round of financing.
Furthermore, convertible notes usually execute when a “qualifying transaction takes place” or upon agreement between both parties. SAFE on the other hand, can be converted when you raise any amount of equity investment.
Is SAFE possible in Thailand?
There are no specific legal mechanisms for SAFE investments in Thailand. Share offerings are regulated by the Securities and Exchange Act B.E. 2535 (1992) and Thai’s Civil and Commercial Code (“Thai CCC”). Thai CCC, however, does not allow the issuance of convertible shares or an option to acquire future shares of private companies. SAFE investments, therefore, must proceed indirectly through permissible mechanisms of the Thai CCC.
Should I use a SAFE or a convertible note?
SAFE investments offer similar levels of flexibility when compared to a convertible note, while also addressing some of the more complex issues found with convertible notes.
Much like convertible notes, investors fund the company and receive a SAFE agreement as opposed to upfront equity. The SAFE entitles them to receive future shares in the company, providing the triggering event occurs. Common triggering events include the successful raising of equity capital, an acquisition or an Initial Public Offering.
SAFEs are generally easier and cheaper to utilize than convertible notes, this makes them an attractive option for start up companies looking to generate funds. However, there has been some negative criticism regarding investor protection, or lack of it. The main concern stems from the fact an investor may never receive any equity from their investment, if a triggering event doesn’t occur. This is not the case in relation to convertible notes, should a triggering event not occur here, the investor is still entitled to receive interest payments or even repayment of the investment should the maturity date be reached.
While some investors may be wary of the perceived lack of investor protection when dealing with SAFEs, the flexibility provided for startups seeking funding is an attractive proposition. More and more investors consider SAFEs to be a cost-effective way for startups to raise their early funding rounds and investors to ultimately end up with equity at a decent price.
The Thai CCC however prohibits the offsetting of share price with debts, which prevents investors from directly enforcing the receipt of future shares acquired from SAFEs. As discussed above, the issuance of future shares shall be in line with the permissible mechanism of Thai CCC, i.e. increasing the company’s registered capital by issuing preference shares.
Key terms of SAFE
A valuation cap is essentially a pre-agreed maximum valuation for the company. The valuation cap is a way to cap the risk early-stage investors will take. Early stage investors are usually investing in the most volatile and unpredictable phase for a startup and this cap provides some form of protection.
The discount rate is the amount by which the traditional equity share price is discounted for the SAFE. For example, if a SAFE investor gives the company $1 million and there is a discount rate of 50%, at the time of a triggering event the SAFE would convert into shares of the company at a 50 percent “discount” from the price being paid by the new investors. Therefore, if the shares being sold in the new equity financing are being sold for $1 per share, the SAFE investor’s $1 million would convert at a price of $0.50 per share (i.e. a 50% discount) and they would receive 2 million shares.
SAFEs usually become eligible for repayment or convert into shares of the company at a specific time or the occurrence of a triggering event. SAFEs don’t have a maturity date so any return on investment is reliant upon these events.
In the event of a triggering event taking place, the SAFE will become due for repayment or convert into shares of the company automatically.
Belaws is here for startups
Belaws and our team of expert lawyers have been helping many startups in Thailand achieve their fundraising goals. If you would like to learn more about how our experts can help you initiate a round of SAFE fundraising, or explore other opportunities, please feel free to contact us.
Our consultations ($150) last for up to 1 hour and are conducted by expert Lawyers who are fluent in English, French and Thai.
Consultations can be hosted via WhatsApp or Video Conferencing software for your convenience. A consultation with one of our legal experts is undoubtedly the best way to get all the information you need and answer any questions about your new business or project.
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