SPA, CLA and SAFE – Investment agreements
What is an SPA, a CLA and a SAFE?
An SPA, a CLA and a SAFE are different types of investment agreements available to an entrepreneur who wishes to invest in a company. SPA is an acronym for a Share Purchase Agreement; CLA refers to a Convertible Loan Agreement and SAFE means Simple Agreement for Future Equity. Each of these will be discussed in turn, with a focus on their relative advantages for potential investors.
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Share Purchase Agreements
An SPA is the most investor friendly of the options and is the conventional route for venture capitalists to invest in a company throughout all of its stages. It is also the most complex of the agreements and can run several hundred pages; as as Share Purchase Agreement envisions a multitude of scenarios in which the potential investor would need to be protected. For example: what if the company fails to meet its goals? What if its valuation drops in the future? These and many other scenarios would need to be addressed.
What sets an SPA apart from the other two agreements is that it involves company valuation, meaning the investor buys shares in a company at the given price per share at that point in time. This is advantageous to the investor, as the valuation affords him clarity.
The complexity of an SPA may justify the engagement of expensive legal counsel and is, therefore, usually undertaken only at the post-seed round of investment.
Convertible Loan Agreement
In essence, a CLA is a loan that can be converted to equity. As with all loans, it has an interest rate (usually around 8%) and a maturity date. At this point the investor has the choice of being repaid the loan, with the accrued interest, or of converting it into company shares. This usually takes place upon maturity without the option of the investor being paid annually. Conversion would be subject to an agreed upon price per share or a discount from a future investment round.
Since very high valuation would translate to the investor having reduced equity, there exists the possibility that the investor would buy the shares at a capped value. This would afford a measure of protection should the company valuation be very high. This would be applicable in the event of an investment round, in which the investor would be allowed to buy the shares at a reduced price.
The CLA is more suited to an entrepreneur, as the sides do not need to involve themselves in the company’s valuation. However, the company assumes the risk of incurring a large financial burden should the investor choose not to convert the loan into equity. What separates venture capital firms from more conservative investors is that the former tend to convert their loans to equity, whereas the latter generally prefer to collect on their debt upon maturity.
Simple Agreement for Future Equity
As the name suggests, SAFE is the easiest agreement to undertake and the most amenable to entrepreneurs. This agreement does not contemplate the current valuation of the company, which is postponed to the next round. It is ideal for the seed-stage of a company’s development and has the advantage of saving on the effort and considerable legal expenses involved in the drafting of an SPA.
The risk to the investor is that there will be no future investment rounds. For this reason, it is advisable that the SAFE include a clause stating that if the next round will not be undertaken by a given period, the investor will be able to purchase his shares at a known price per share. Both the CLA and the SAFE afford the investor a measure of protection. Each gives a discount on the valuation of the next round and also a cap (maximum valuation) to protect the investor in the event of high company valuation.
Each of the above agreements should be carefully considered in light of investor needs.
We at Cohen, Decker, Pex and Brosh can advise you on your investment agreements and corporate needs. Contact our offices in Jerusalem or Tel Aviv for advice on company law in Israel. A corporate law attorney will be happy to aid you.