The Legal Nature of a SAFE in Georgian Law
A SAFE — a simple agreement for future equity — does not exist as a separate contract type in Georgian law: the instrument is assembled from two sets of norms. The first is the norm of the Law on Entrepreneurs under which an entrepreneur entity is entitled to issue debt securities (bonds), including ones that carry the right of conversion into shares (Article 34¹). A debt security implies a monetary claim against the entity and may be issued with or without the payment of periodic interest (a coupon).
The second is the regime of securities convertible into shares: a joint-stock company may issue other securities convertible into shares in the manner established by law (Article 158, part 6). A debt security may encompass, among other rights, precisely the right of conversion into shares — this is the hinge by which the conversion mechanism of a SAFE is fitted onto Georgian norms. The obligatory side — the claim arising in exchange for the investor's contribution — rests on the general contract rules of civil law, since the instrument is not named in the law as a separate type.
The Terms of a Debt Security Issuance
The rights and obligations of holders of debt securities towards the entity are determined by the terms of issuance and by the relevant legislation. The terms of issuance or the charter may also establish particular powers exercised by the meeting of holders in their own name — including matters connected with the restructuring of the obligation (Article 34¹, part 2).
The terms of issuance must be accompanied by the issuance prospectus or the equivalent document on the basis of which the securities were issued, and by acquiring the debt securities a person agrees to those terms (part 6). In startup financing practice this means that every parameter of a SAFE or a convertible note — the conversion price, the discount, the triggering events — must be fixed precisely in the document.
Classes of Shares and the Outcome of Conversion
The status of the shares issued upon conversion is determined by Article 158. Unless the charter provides otherwise, a share may be ordinary or preferred: one ordinary share secures one vote at the general meeting, while a preferred share does not carry voting rights, except in cases provided by law or the charter, and the number of preferred shares must not exceed half of the number of placed shares (part 1).
A preferred share gives its holder the advantage established by the charter as to the dividend rate and the order of receipt, and the same advantage operates in the distribution of the property of a dissolved company among the shareholders (part 2). The class, quantity and rights of shares must be reflected in the charter before placement, and a change of the rights attached to already placed shares is admissible only with the consent of three quarters of the holders of the shares of the relevant class (part 5) — quotas that must be factored in when planning a conversion.
Capital Increase and the Issue of New Shares
Conversion is carried out under the general rules of change of capital: unless the charter provides otherwise, the decision to increase the capital through the issue of additional shares is taken by the general meeting by no less than three quarters of the votes of the participants in the voting, and the decision indicates the quantity and type of shares to be placed and the procedure and conditions of their placement (Article 164, parts 1 and 2).
Shares issued upon a capital increase must be redeemed at the moment of placement at no less than 25 percent of the nominal value, while a non-cash contribution must be fully executed within 5 years of the decision and is subject to independent valuation (parts 3 and 4). For a convertible instrument this means that the conversion price must be calculated in advance so that these statutory requirements are not breached at the moment of issue.
Frequently Asked Questions
Is there a separate legal type of SAFE in Georgia?
No. The instrument is assembled from the norm on the issue of debt securities (Article 34¹), the regime of securities convertible into shares (Article 158) and the rules on the increase of capital (Article 164).
Can a security be issued without a coupon?
Yes — a debt security is issued with or without periodic interest (a coupon) (Article 34¹), which corresponds to the SAFE design.
What voting rights do converted shares carry?
An ordinary share secures one vote at the general meeting; a preferred share carries a dividend advantage without voting rights, save for exceptions, and its share does not exceed half of the placed shares (Article 158).
How is the capital increase decided?
By the general meeting, with no less than three quarters of the votes; shares may not be issued below 25 percent of the nominal value, and a non-cash contribution is valued and executed within 5 years (Article 164).
How We Help on Legal.ge
The Legal.ge team assists startups and investors in structuring SAFEs and convertible notes: preparing the document on Georgian norms, calculating the conversion price and triggering events, drafting general meeting resolutions and the necessary charter amendments. We examine the instrument's risks from both sides and ensure that the conversion is lawfully executed. Contact us to discuss your round.