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SAFE Agreement

The Agreement Between a Company and a Consultant that Grants the Consultant the Right to Convert Sweat Equity Contributions into Future Equity

What it is: This agreement template is one of the various forms of Sweat Equity that is built into our app. It is incorporated into the Sweat Equity Agreement and a specific SOW that calls for all or part of the compensation for a specific deliverable by a Consultant to be compensated in the form of a SAFE (Simple Agreement for Future Equity). A SAFE documents the negotiated value of the Consultant's contributed effort that will be converted into the same equity that the investor gets in a future venture capital investment round.

How it is used:

  • A Company should use a SAFE to issue equity to a Consultant to avoid adverse tax consequences when issuing equity in exchange for any work deliverables. If a Consultant is simply granted equity, then the value of the equity is immediately taxable in the form of personal income taxes at the time of issuance (typically at a time with the lowest probability of the future value of the equity). However, if a Consultant receives a SAFE, the value of the Consultant's contribution that is compensated in the form of a SAFE is not taxable at the time of issuance, but is taxable when and if the Company receives a venture capital investment (typically a sign of success and the ability to launch) that triggers the conversion of the SAFE into equity in the Company. Therefore, using a SAFE helps the Consultant manage the tax impact and risk premium for better alignment of risk/reward. The SAFE form assumes the Consultant is an accredited investor and understands the risk of investing their time in a SAFE. (Be sure to seek competent legal and tax advice when choosing amount the various forms of Sweat Equity to avoid any negative consequences)

  • Our app will walk you through the step-by-step process of filling in all blocks of information, along with all of the necessary tips, instructions, and examples

  • This agreement form will typically only take a couple of minutes to complete if you have the necessary inputs at hand

  • Once you've completed the form, you can download and send it to your attorney and/or tax advisor to review and/or sign online and send it to the Consultant to review and sign

  • All completed forms for all Sweat Equity Consultants that you complete are logged in your subscriber dashboard

1

Complete one overall Sweat Equity Agreement for each Consultant

2

Complete a separate Statement of Work (SOW) for each phase of work

3

Issue the Sweat Equity upon acceptance of the deliverables

Important Considerations:

Compare this table with the other forms of Sweat Equity on our Sweat Equity 101 page.

Degree of Flexibility

Very flexible – can issue multiple SAFE agreements over the life of the Company

Potential Tax Consequences

Taxable at personal income tax rates upon conversion (this can be a huge negative surprise to a Consultant that only received a SAFE and no cash to pay the cost of the tax implications), plus Capital Gains tax upon an exit

Type of Upside

Converts to the same equity as venture capital investors, typically Series A Preferred equity, which has more preferences than the founder’s common equity

Basis of Sweat Equity Value

Overall value of the company

Realizing the Value of Sweat Equity

Only upon an exit

Current Valuation of the Company

No valuation is required

Other Consequences

No downside protection for the Consultant if the Company fails. The downside protection for the Company if the Consultant fails to deliver is through the process of issuing only a small amount of equity via the SAFE for small projects

What it contains: Our SAFE template is an 8-page agreement that is incorporated into the overall Sweat Equity Agreement and SOW and includes the following items:

  • Conversion Rights - this template contains the specific language for how the amount of the SAFE (the value of the Consultant's time contribution) is converted into a venture capital investment round and into the same securities as the venture capital investor.

  • Conversion Terms - the agreement form includes the Conversion Cap (the maximum valuation of the investment as further described in our in-app instructions) and Discount Rate (the discounted price paid for the securities as further described in our in-app instructions).

  • General Provisions - the SAFE form includes other required details regarding representations and securities notices.

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Explore the Specific Agreements Included in Our App