Armenia Introduces SAFE Contracts to Boost Startup Investments

A SAFE (Simple Agreement for Future Equity) contract allows investments in start-up joint-stock companies, contingent upon the company's success, wherein investors receive shares under favorable conditions.

The National Assembly of the Republic of Armenia ratified the law "On Amendments to the Law on Joint Stock Companies," developed by the Ministry of Economy and the expert team of the Investment Council of Armenia under the SME Council chaired by Deputy Prime Minister Tigran Khachatryan. The objective of this legislation is to establish legal frameworks for attracting investments in Armenian companies through the SAFE contract.

WHAT IS A SAFE CONTRACT?

It's an internationally recognized investment tool used primarily for financing start-ups or companies in their early (pre-seed and seed) stages. Widely favored by business angels for initial-stage investments, it provides a dependable and recognizable mechanism for them.

Legally, a SAFE contract entails an investor injecting funds into a company, usually a modest amount, with the stipulation that if the company succeeds (by attracting larger investments, acquisition by a bigger firm, etc.), the investor receives a predetermined number of shares proportional to their investment. In the event of the company's failure (bankruptcy, liquidation, etc.), the invested amount is eligible for reimbursement.

WHAT PROBLEM DOES THE SAFE CONTRACT ADDRESS?

The absence of a SAFE contract often deterred investors from investing in Armenian start-ups due to the additional expenses associated with legal scrutiny. In our context, leveraging this instrument becomes more significant, considering the availability of investment crowdfunding opportunities in the country and the importance of enhancing the likelihood and accessibility of investments in small enterprises from the Diaspora.

Typically lacking a fixed term or the need for interest payments, unlike direct share sales, a SAFE contract does not confer immediate management participation, dividend reception, or other shareholder rights. In bankruptcy scenarios, investors hold a higher priority.

HOW IS IT UTILIZED?

If you have a concept and seek investors to finance your start-up, the investor can convert their investment into shares upon your project's success. For instance, if your start-up flourishes into a thriving business after four years, the investor secures a pre-agreed share per the contract. Conversely, if the criteria for failure are met, the investor can reclaim their investment. It's crucial to note that contract terms are mutually agreed upon by the involved parties.

Link to the law: here.

 Investment Council of Armenia is implemented by the EBRD in collaboration with the UK Government’s Good Governance Fund.