Simple Agreement for Future Equity (United States)
Parties
This Simple Agreement for Future Equity (the "Instrument") is made on the date on which it is signed by the last of the parties.
It is made between [Company legal name and details], a corporation incorporated under the laws of Delaware (the "Company"), and [Investor legal name and details] (the "Investor").
Key Terms
"Purchase Amount" means [Purchase Amount (with currency)].
"Valuation Cap" means [Valuation cap].
"Discount" means [Discount (percentage off the financing price)].
"Minimum Financing Amount" means [Minimum cash raised for an Equity Financing].
"Governing State" means Delaware.
Definitions
"Capital Stock" means the capital stock of the Company, including its common stock ("Common Stock") and its preferred stock ("Preferred Stock"), and "Securities Act" means the United States Securities Act of 1933, as amended.
"Equity Financing" means the first bona fide sale by the Company of shares of Preferred Stock at a fixed valuation, in one transaction or a series of related transactions with the principal purpose of raising capital, in which the Company receives gross cash proceeds of at least the Minimum Financing Amount (not counting the conversion of this Instrument or of any other Converting Security).
"Standard Preferred Stock" means the series of Preferred Stock sold to the new-money investors at the first closing of the Equity Financing.
"Investor Series" means a series of Preferred Stock issued to the Investor on conversion that carries the same rights, preferences, privileges and restrictions as the Standard Preferred Stock, except that every price-based entitlement (the liquidation amount per share, the initial conversion price and any per-share dividend) is set by reference to the Conversion Price instead of the price of the Standard Preferred Stock.
"Converting Securities" means this Instrument and every other simple agreement for future equity, convertible note or other security of the Company that converts or may convert into Capital Stock, whether or not it converts in the Equity Financing.
"Liquidity Event" occurs on whichever comes first of (a) a Change of Control, (b) the completion of a Direct Listing and (c) the closing of an Initial Public Offering.
"Change of Control" means a merger, consolidation or share sale after which the persons who held the Company's voting securities immediately before no longer hold a majority of the voting power of the Company or its successor, or the sale, lease or other disposal of all or substantially all of the Company's assets.
"Direct Listing" means the first time the Company's Common Stock is admitted to trading on a US national securities exchange, where the Company files a resale registration statement for shares already in issue and no underwriters sell new shares to the public; "Initial Public Offering" means the Company's first public sale of Common Stock through underwriters who commit to buy the offered shares, closed under an effective registration statement under the Securities Act.
"Dissolution Event" means a voluntary termination of the Company's operations, a general assignment for the benefit of its creditors, or any other liquidation, dissolution or winding up of the Company, voluntary or involuntary, other than a Liquidity Event.
"Proceeds" means the cash and other assets (including stock consideration) that are payable to the Company's stockholders in a Liquidity Event, or are legally available for distribution to them in a Dissolution Event, after payment of the Company's debts and other creditor claims.
"Company Capitalization" means, calculated immediately before the first closing of the Equity Financing and without counting any share twice, the number of shares of Common Stock that would be outstanding if every share of Capital Stock were converted to Common Stock, every outstanding option, warrant and similar right and every option the Company has promised but not yet granted were exercised, every Converting Security converted, and the unissued shares reserved under the Company's equity incentive plans were all issued; any increase of that reserve made in connection with the Equity Financing counts only to the extent promised options exceed the reserve as it stood before the increase.
Purchase and Payment
The Investor shall pay the Purchase Amount to the Company in cleared funds on the date of this Instrument or, if later, within 5 business days after the Company gives written wire instructions. In return the Company issues this Instrument to the Investor, which gives the Investor the right to receive Capital Stock of the Company on the terms below. The Company shall use the Purchase Amount for its business operations.
This Instrument is not a loan and not a debt security. It carries no interest, has no maturity date and creates no obligation of the Company to repay the Purchase Amount except as stated in the Liquidity Event and Dissolution Event provisions. The Investor is not a creditor of the Company by reason of this Instrument.
Conversion on an Equity Financing
If an Equity Financing closes while this Instrument is outstanding, this Instrument converts automatically at the first closing of that financing. The Investor receives whichever of the following gives it more shares: (a) Standard Preferred Stock, issued at the lowest price per share paid for Standard Preferred Stock; or (b) shares of the Investor Series, issued at the Conversion Price. In each case the number of shares is the Purchase Amount divided by that price. The Investor Series is issued under the Company's certificate of incorporation, which the Company shall amend before the closing if the series is not yet authorised.
Conversion Price
The "Conversion Price" is the Valuation Cap divided by the Company Capitalization. No discount applies.
Conversion on an Equity Financing
On conversion the Investor shall sign the same transaction documents, with such changes as the Investor Series requires, that the new-money investors sign for the Standard Preferred Stock, provided that those documents give the Investor the customary exceptions from any drag-along and limit the Investor's representations, warranties, liability and indemnities to its own authority, title and status as an accredited investor. The Company shall deliver the share certificates or book-entry notices within a reasonable time after the first closing.
No fractional share is issued on conversion. The number of shares is rounded down to the nearest whole share and the Company pays the Investor in cash the value of the fraction at the price per share used for the conversion.
Liquidity Event
If a Liquidity Event occurs while this Instrument is outstanding, the Investor is entitled to be paid out of the Proceeds, at or immediately before the closing of the Liquidity Event and subject to the ranking in the Dissolution Event provision, whichever is the higher of: (a) the Purchase Amount (the "Cash-Out Amount"); and (b) what holders of Common Stock would be paid on the shares that the Purchase Amount would buy at the Liquidity Price (the "As-Converted Amount"). The "Liquidity Price" is the Valuation Cap divided by the capitalisation of the Company immediately before the Liquidity Event, counted as in Company Capitalization but leaving out unissued option pool shares. If holders of Common Stock may choose the form of consideration, the Investor has the same choice, except for a form it is not legally eligible to receive.
Dissolution Event
If a Dissolution Event occurs before this Instrument ends, the Company shall pay the Investor the Purchase Amount out of the Proceeds immediately before the Dissolution Event is completed. That payment ranks after the Company's debts and other creditor claims, level with payments to holders of other Converting Securities and Preferred Stock, and ahead of any distribution to holders of Common Stock. If the Proceeds do not cover everyone at that level in full, they are shared pro rata.
Nothing in this Instrument gives the Investor a security interest in any asset of the Company or any right to payment ahead of the Company's creditors.
No Stockholder Rights
Until shares are issued to the Investor on conversion, the Investor is not a stockholder of the Company and has no right to vote, to receive notice of meetings, to receive dividends or to consent to any corporate action, and nothing in this Instrument gives the Investor any such right.
Pro Rata Rights
The Investor may buy up to its pro rata share of the Standard Preferred Stock sold in the Equity Financing, on the same terms as the other buyers. Its pro rata share is the number of shares it receives on conversion divided by Company Capitalization. The right ends at the first closing of the Equity Financing and may be exercised by notice within 10 business days after the Company tells the Investor the terms.
Information Rights
While this Instrument is outstanding, the Company shall give the Investor its annual financial statements within 120 days after the end of each fiscal year and notice of any Equity Financing, Liquidity Event or Dissolution Event when its board approves it. The Investor shall keep information received confidential and use it only to monitor its investment.
Most-Favoured-Nation Rights
If, before the first closing of an Equity Financing, the Company issues any other Converting Security with a lower valuation cap, a higher discount or a more favourable conversion or payout term than those of this Instrument, the Company shall promptly notify the Investor, who may within 15 business days elect by notice to adopt those terms in place of the corresponding terms of this Instrument, as a whole and not selectively.
Company Representations
The Company represents to the Investor that: it is a corporation duly organised, validly existing and in good standing under the laws of Delaware; it has the power and has taken all necessary corporate action to sign and perform this Instrument, and it is binding on it, subject to bankruptcy and general equity principles; signing and performing it does not breach its certificate of incorporation, bylaws, any law or any material contract, and needs no consent other than corporate approvals, securities filings and the approvals needed to authorise the shares issuable on conversion; and its capitalisation, as most recently disclosed to the Investor in writing, is accurate in all material respects.
Investor Representations
The Investor represents to the Company that: it has full power and authority to sign this Instrument and it is binding on it; it meets one of the accredited investor tests in Rule 501(a) of Regulation D under the Securities Act and understands the Company may void this Instrument and return the Purchase Amount if the Investor is not accredited when an Equity Financing closes; it is acquiring this Instrument, and will acquire any shares issued on conversion, as principal for its own investment and not to resell or distribute them; it has had the chance to ask questions of the Company and has enough knowledge and experience to evaluate the risks, including that it may lose its whole investment; and it has not been offered this Instrument by general solicitation or general advertising.
Securities Law Matters
This Instrument and the shares issuable on conversion have not been registered under the Securities Act or any state securities law. The Company is offering and selling them in reliance on an exemption from registration for private placements, and may file a notice of exempt offering (Form D) and state notices where required. Each certificate or book-entry record for them shall carry a legend stating that they are unregistered and may not be offered, sold, pledged or transferred except under an effective registration or an available exemption. The Investor acknowledges that they are restricted securities.
Transfer
The Investor may not sell, assign, pledge or otherwise transfer this Instrument or any right under it without the Company's written consent, which may not be unreasonably withheld, except to an affiliate of the Investor, a fund under common management, or on the Investor's death to its estate or heirs, in each case if the transferee signs a joinder and the transfer complies with securities law. Any transfer in breach is void.
Amendment and Waiver
Any term of this Instrument may be amended or waived with the written consent of the Company and either the Investor or the holders of a majority of the purchase amounts of all outstanding instruments of this form with the same valuation cap and discount (an instrument without one of them counting as the same as to it), provided that the Purchase Amount cannot be changed this way, every such holder must be asked for its consent, and the change affects all those holders in the same way.
Termination
This Instrument ends on the earlier of (a) the issue of shares to the Investor on conversion in an Equity Financing and (b) the payment, or setting aside for payment, of the amount due to the Investor in a Liquidity Event or Dissolution Event. Ending this Instrument does not release a party from liability for an earlier breach.
Tax Treatment
The parties intend that, for United States federal and state income tax purposes, this Instrument is treated as a purchase of stock of the Company and not as debt, and each shall report consistently with that intent on its tax returns unless a taxing authority or a court determines otherwise. This is the parties' reporting position only. No party gives tax advice to the other, and the Investor and the Company each rely on their own advisers, including about whether any person receiving restricted stock on conversion should make an election under section 83(b) of the Internal Revenue Code.
Notices
A notice under this Instrument must be in writing and is treated as given when delivered by hand or courier, when sent by email to the address in the Key Terms (with no bounce-back), or 3 business days after posting by certified mail with postage paid. A party may change its address by notice. The Company's address is [Company notice address and email] and the Investor's address is [Investor notice address and email].
General
This Instrument is the whole agreement between the parties on its subject. A provision held invalid is severed and the rest continues. This Instrument may be signed in counterparts and by electronic signature, each of which is an original and all of which together are one instrument. Neither party may assign its rights except as the Transfer provision allows.
Governing Law and Disputes
This Instrument is governed by the laws of the Governing State without regard to its conflict-of-laws rules. The state and federal courts located in the Governing State have exclusive jurisdiction over any dispute arising out of it, and each party consents to personal jurisdiction there.