The Wire:
Legal
The Wire:
Legal
What is an ABACO?
It stands for "Acuerdo Básico de Acciones a Compra" (ABACO), the ABACO is an option contract between an investor and a startup that gives the investor the right, in exchange for a capital contribution, to become a shareholder of the startup in the future.
Avalancha Ventures designed the ABACO with and for its entrepreneurs and has published it in the public domain for the benefit of the entire entrepreneurial ecosystem. The ABACO operates under Mexican law.
What are its most important characteristics?
- The startup and the investor keep record of a capital contribution in a simple and agile way.
- The startup can obtain financing with different investors at different times, without altering the capital structure of the company in each financing.
- The valuation of the startup is postponed until the moment when there is more evidence regarding the direction of the company and, therefore, it becomes a fair financing mechanism for both investors and entrepreneurs.
- In accounting terms it qualifies within the capital accounts, which is consistent with the nature of the long-term investment.
- It has no expiration date or interest rate, which takes pressure off the startup.
- Keeps the startup´s capitalization table simple when the uncertainty regarding its success is still very high, significantly facilitating the tasks of a possible bankruptcy and / or liquidation process.
- Significant legal savings, when using standard documentation.
Does the ABACO resemble a standard international document?
The ABACO is based on the SAFE of Y Combinator and the KISS of 500 Startups, which work for the United States market. The ABACO works and is designed for the mexican market.
Are there any other financing mechanisms for startups?
In addition to ABACO, the most widely used instruments are convertible notes and capital contributions through the sale of shares.
Where can I download a standard version of ABACO?
You can find the standard ABACO document here. The last update was made in August 2017.
SAFE
What is a SAFE?
SAFE stands for a “Simple Agreement for Future Equity”. Just like the ABACO, a SAFE grants an investor the right to obtain equity to become a shareholder of a startup at a future date, assuming the startup sells shares in a subsequent financing.
This instrument was created and published by Y-Combinator in 2013 to replace at the time other common instruments like convertible notes and equity.
What are it´s most important characteristics?
- A SAFE allows a startup to raise funds similarly to a convertible note, however, a SAFE is not a debt instrument, it does not accrue interest, have a maturity date or a legal obligation to be paid back by the startup company
- Same structure as the ABACO adjusted for startups incorporated in the United States.
Pre-Money SAFE vs. Post-Money SAFE
- The Pre-Money SAFE will convert to shares along with all the other convertible instruments in the next equity round, until then investors can´t know precisely their ownership of the company. During the conversion the SAFEs will dilute each other.
- The Post-Money SAFE by considering the post money valuation of the company allows investors to get more transparency on the ownership of their investment right from the start.
- Unlike the Pre-Money the conversion of other instruments won´t dilute the percentage ownership of the Post-Money investor whether these instruments are Convertible Notes or SAFEs (Pre-Money or Post-Money).
Where can I download a standard version of a SAFE?
You can find the Post-Money SAFE templates from YCombinator here.
How do the different financing mechanisms compare?
| Characteristics | ABACO/SAFE | Convertible Note | Equity |
|---|---|---|---|
| Easy and agile documentation | YES | YES | NO |
| Flexibility to obtain ongoing financing | YES | YES | NO |
| Valuation is postponed in the future when there´s more information | YES | YES | NO |
| Equity Instrument | NO | NO | YES |
| The instrument has no expiration date | YES | NO | YES |
| The instrument has no interest rate | NO | YES | NO |
| Simple capitalization table for the startup | YES | YES | NO |
| Minimization of legal costs | YES | YES | NO |
| Investor is shareholder of the startup | NO | NO | YES |
If you have comments or improvements, contact us at info@avalancha.ventures.
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