For example, the founders of Magnificent Puzzles have decided to turn their small business into an international chain, and they are looking for $500,000 in stakes. The company was valued at $2 million. Venture capital firm Equity Excitement decides to invest $250,000, which means they earn 12.5 percent of equity through The Magnificent puzzles. In the future, when the value of Magnificent puzzles doubles, the value of Equity`s initial investment will also have doubled. Equity Excitement`s investment is now worth $500,000. The exact conditions of a SAFE vary. However, the basic mechanics[1] are that the investor makes available to the company a certain amount of financing at the time of signing. In return, the investor will later receive shares in the company in connection with specific contractual liquidity events. The main trigger is usually the sale of preferred shares by the company, usually as part of a future fundraising cycle.

Unlike direct equity acquisition, shares are not valued at the time of SAFE signing. Instead, investors and the company negotiate the mechanism with which future shares will be issued and defer actual valuation. These conditions generally include an entity valuation cap and/or a discount on the valuation of the shares at the time of triggering. In this way, the SAFE investor participates above the company between the signing of safe (and the financing provided) and the triggering event. Another important advantage of the use of capital compensation agreements is the commitment that these agreements generate. If you take someone against a part of the business on board, that employee essentially becomes the owner. Say that a person wants to buy a house, but they cannot afford to do it alone. If a parent is willing to help the individual buy the home, they can choose to help the individual by entering into a shared equitation financing contract. In the agreement, both parties obtain conditions that vary from one situation to another. Like all forms of fundraising, participation has both advantages and disadvantages. One of the most advantageous features of equity is that, unlike regular bank financing, no regular payment is required. Investors look forward to a future opportunity to pay their share of the profits.

Another advantage is that equity investors (especially those known as “Engel-Investors”) can offer valuable advice and advice to support the growth of your business. In addition, it is often easier to acquire early investments from family and friends because they share your enthusiasm for your success. Sometimes startups will include “vesting” provisions in their sweat equity agreement. Vesting means that the company makes available to potential shareholders shares issued incrementally, for a certain period of time or after certain stages. Contractors can use capital contracts to woo the best talent in their sector for positions across the company. In the case of Facebook and Google, business creators used executives and senior executives they could not afford by using equity to compensate them. In the initial fundraising phase, you determine a certain valuation of your business. In other words, you decide what your business is worth at this point. Depending on the valuation of your business and the amount of money an investor gives to your business, you own a percentage of shares. Once your company goes public or sells, it receives compensation in the same proportion as it invested. These provisions encourage the worker to stay longer in the company or to obtain certain services. This allows the startup to ensure that the worker does not just take over the equity and does not provide the agreed services.