NeoITO

Everything You Need to Know About NeoITO SAFE Note

How is NeoITO’s SAFE different from a traditional SAFE?

In a traditional SAFE, the amount invested is called the purchase amount. The purchase amount is used to calculate the number of shares of preferred stock being issued in the first equity financing by dividing the purchase amount by the calculated price per share.
NeoITO is investing in the company by providing discounted services in exchange for a promise for equity in the future. Unlike the traditional SAFE, the amount of that investment won’t be fixed from the beginning. The services needed by the company, and its ability to pay for such services are expected to evolve over time. Accordingly, the NeoITO SAFE is built to account for that evolving investment by replacing the purchase amount with a principal value. The principal value will adjust to account for the services provided over time and the amount paid for such services.

What is a Monthly Principal Adjustment?

The monthly principal adjustment is the difference between the value of the services provided by NeoITO in a given month, based on NeoITO’s standard pricing schedule, and the amount actually paid by the company for such services.

What is the Ledger?

A ledger will be maintained by NeoITO, and shared with the company, to keep a running total of the monthly principal adjustments throughout the term of the relationship.

How is the Principal Value determined?

The principal value is equal to the sum of all of the monthly principal adjustments times five. The 5x multiple reflects the value that NeoITO’s services have consistently created for its clients, far beyond the price of the individual services provided.

What rights will NeoITO have to invest in the company in the future?

In connection with the execution of the SAFE, the company will need to sign a Pro-Rata Right Side Letter which will give NeoITO the right to invest additional capital into the company based on certain criteria set forth in the letter. NeoITO’s pro-rata right will adjust over time if the company hits different financing thresholds. The pro-rata right will operate as follows based on the indicated cumulative amount of funds raised from preferred stock investors:

  • $0 - $5,000,000: NeoITO will have the right to purchase the number of shares that will result in NeoITO owning up to 10% of the then-outstanding shares of the company, at a price per share equal to 80% of the price being paid by preferred stock investors.
  • $5,000,0001 to $10,000,000: NeoITO will have the right to purchase the number of shares that will result in NeoITO owning up to 10% of the then-outstanding shares of the company, at a price per share equal to the price being paid by preferred stock investors.
  • $10,000,001 and up NeoITO’s pro-rata right will terminate and they will no longer have any rights to purchase shares of the company.

How will the number of shares of preferred stock that the NeoITO SAFE converts into be calculated?

The price per share of the preferred stock will be calculated using one of two methods, whichever one will result in the lowest price per share for NeoITO.

  • Discount Price: The discount price is determined by multiplying the price per share of the preferred stock being sold to investors multiplied by the discount rate.
  • Valuation Cap Price: The Valuation Cap Price is determined by dividing the Valuation Cap by the Company Capitalization at the time of the first preferred stock equity financing.

The valuation method that will result in the lowest price per share will be the price at which the SAFE converts.

Once that price has been determined, the number of shares of preferred stock granted to NeoITO will be calculated by dividing the principal value by such SAFE price.

What happens if the company never raises additional funds?

If the company does not raise additional funds, NeoITO will have an option to convert the SAFE into the common stock of the company after three years.

What is the most favoured nation provision?

The most favoured nation provision establishes that if the company issues additional SAFEs after the NeoITO SAFE that have superior terms (higher discount rate or lower valuation cap) then the terms of the NeoITO SAFE will automatically adjust to match such terms.

Will NeoITO continue to provide services once the company has raised money?

Yes, if the parties mutually agree. Once the company has raised money above a certain threshold, to be determined between NeoITO and the company, NeoITO will no longer provide the services at a cash discount in exchange for the promise for equity. The company will need to pay the market value of NeoITO’s services at that point.

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