& Commercial Litigation

Today, innovation is the norm. Business models are constantly evolving, and financial instruments play a crucial role in shaping the business future. This article looks at three emerging models that impact the business and financial landscapes: the widely used convertible loan, the Simple Agreement for Future Equity (SAFE), and the Agreement for Subscription against Advance Payment (ASAP). In this contribution, we delve deeper into these models, examine their impact on companies and investors, and shed light on the legal considerations inherent in these financial approaches. Converible loan A convertible loan is a financing instrument widely known and extensively used by especially young companies to attract capital. It combines features of both debt and equity, making it attractive to both investors and entrepreneurs. In practice, a convertible loan is a loan that can be converted into shares of the issuing company at a later date. In exchange for providing capital, the investor receives interest payments during the loan period. At a predetermined moment, often under specific conditions in the agreement, the investor and/or the company itself have the option to convert the loan into shares of the company. When entering into a convertible loan, investors should carefully study the conversion terms. This includes determining the conversion moment, the conversion price, and any adjustments that may occur in certain events, such as a new financing round or even bankruptcy. The ranking relative to other creditors/shareholders is crucial in case of bankruptcy or liquidation of the company. Finally, investors must be aware of their rights during the loan period, such as protection clauses or input in significant decisions. Clear communication is crucial when drafting the convertible loan. Transparency can prevent future disputes, and it is advisable to document all agreements in advance in a legally binding document. The issuing company should therefore specify how the provided capital will be used and be accountable to the investor. In addition to agreements on the loan and its conversion, parties should also consider the situation after conversion and the agreements regarding the mutual legal relationship as shareholders. Simple Agreement for Future Equity (SAFE) A Simple Agreement for Future Equity is a financing agreement between an investor and a company, often a startup (commonly early seed), wherein it is agreed that the investor has the right to a certain number of shares in the company on a future date, typically during a future financing round. Unlike convertible loans, a SAFE does not include interest payments or a fixed term. SAFEs are known for their simple structure, speeding up the negotiation process significantly and reducing costs. This makes it an attractive option for investors and entrepreneurs who want to act quickly in the dynamic startup world. Another advantage is that the classic risks of debt are much less present in SAFE agreements since they do not involve interest payments or repayment obligations. However, parties can decide otherwise and structure the SAFE as equity instead of debt. In the Netherlands, the ASAP is increasingly used for equity qualification. This allows startups to grow and invest more easily, and it gives SAFE investors a greater chance to benefit from the valuation growth of a startup. In a SAFE, the investor does not commit to a specific valuation at the time of the investment but rather chooses a valuation method. This also simplifies negotiations. Due to the straightforward nature of SAFE agreements, startups can raise capital more quickly compared to more traditional forms of financing. Administrative burdens are consequently much lower. The company does not need to have a (concrete) valuation, reducing legal costs and complexity. Unlike convertible loans, SAFE agreements do not carry interest expenses, allowing startups to focus on growth instead of generating immediate cash flow. Despite all these advantages of SAFE agreements, it is crucial that the terms regarding conversion, valuation mechanisms, and investor rights are clearly defined. Despite their name, SAFE agreements still bring some legal complexities and risks. It remains essential that both parties are well-informed and seek legal advice to ensure a solid agreement. Understanding the characteristics and legal implications of SAFE agreements is one of the keys to a successful and mutually beneficial financing round. Agreement of Subscription against Advance Payment (ASAP) Lastly, there is the Agreement of Subscription against Advance Payment, or the ASAP agreement. The ASAP is a variant of the SAFE and grants an investor the right to acquire shares in the company’s capital against immediate payment of the issuance price. The paid amount is, unlike the SAFE, booked as equity under reserves instead of as debt. ASAP shares can be issued in various scenarios, such as the closure of a financing round, transfer of more than 50% of the shares, or the occurrence of an event like a bankruptcy application. The remaining amount of the investment after the issuance of ASAP shares is booked as additional paid-in capital. The procedure for issuing ASAP shares includes prior notification to the investor, providing details about the number of shares to be issued, the issuance date, and, in financing rounds or termination, information about new investors and agreed-upon prices. Since the issuance of shares requires cooperation from the startup, the interests of the ASAP investor are protected through an irrevocable power of attorney to issue the ASAP shares before or at the latest by the closing of the new financing round. Additionally, a discount may be applied to the calculated issuance price as an additional safety measure. When the company then makes a profit and the general meeting decides on a profit distribution, the investor has a dividend right. This generally does not apply to interim dividends, allowing the ASAP investment to continue as equity instead of debt. Conclusion This contribution on convertible loans, Simple Agreements for Future Equity (SAFE), and Agreement of Subscription against Advance Payment (ASAP) makes it clear that the business world is in a time of remarkable transformation. These agreements have not only changed the way capital is acquired and managed but have also revised the dynamics between investors and entrepreneurs. Convertible loans, with their unique blend of debt and equity, offer startups a flexible financing route, while SAFE agreements bring speed and simplicity to the venture capital world. On the other hand, the ASAP model illustrates that investments can also be made gradually over a longer period. Within these innovative approaches, a common thread is found: the importance of clear legal frameworks. Whether establishing convertible loan terms, defining SAFE clauses, or formulating transparent subscriptions, legal precision is essential to ensure success and minimize disputes. Understanding these dynamics and embracing legally sound strategies will remain crucial for companies aiming for growth and sustainability in a constantly evolving world. This contribution was written by Reinoud van Ginkel in collaboration with Mathijs Arts. If you have questions about the convertible loan, SAFE, or ASAP, or if you would like to discuss further, please contact Mathijs Arts, Reinoud van Ginkel, or one of our other Mergers and Acquisitions (M&A) specialists.

As countries around the world become more and more connected, the work and content that international lawyers need to handle continues to grow in richness. International lawyers often put more time and effort into drafting consulting contracts than other contracts, as they often involve ongoing and more complex relationships without easily defined deliverables. In drafting these points a few key items should not be left unattended, apart from a solid description of the work to be performed and the price. But that goes without saying. First of all, we need to pay attention to the need to sign a written contract with the client. Even if the communication between the two parties is smooth, the discussion on key points must be written down in a written contract for easy access and can be used as “a time-table”. Communication via email or other social networking software is not conducive evidence if needed at a later stage. Secondly, clauses that limit the amount of damages are very important. While the principle of damage limitation is written into most international consulting contracts, there are still unreasonable clauses. We often see provisions stating that the maximum recoverable damages cannot be higher than the fees paid by our client firms under the contract. Since the potential for damage from underperforming services can easily exceed the amount paid for such services, it is often unacceptable to limit recoverable damages to the fees paid. At the other hand, sometimes consultants offer little recovery so the need demand the consultant takes out insurance to cover the damages is often advisable. While considering limitation of liability clauses, indemnification is also important. Many contracts contain a ‘one-way’ indemnity clause – providing for the client to indemnify the advisor for damages that the client company may have suffered as a result of the advisor’s negligence – but these consulting agreements often ignore the damages that the client firm may have suffered as a result of the advisor’s negligence. Therefore, a two-way ‘indemnity’ clause is necessary. In addition, international consulting contracts and the work performed on the basis of these contracts are subject to intellectual property rights as it often involved  “personal work”. If you pay for this personal work or any documents, designs, etc., then you should have the right to use them and own them. So your contract should provide for that. From the consultants point of view, it is advisable to include a ‘disclaimer’ – stating that the risk of reusing the documents without their consent is at the client’s own risk. Finally, pay attention to the choice of law and the venue for litigation. More than once we encounter that due to a wrong choice of law and venue, the international consulting contract can not be enforced and therefor is actually useless. In general, you should include all of the above provisions in any consulting agreement, whether you are a company that hires foreign consultants or a company that provides consulting services to overseas companies. Consider limitation of liability clauses, individual intellectual property rights, use a written contract and think what happens if things do not turn out as expected. Do you need advice on this topic? Please contact Joost Vrancken Peeters on +31 620210657 or [email protected] or Xinyi Yan at on [email protected].