S.A.F.E.s Aren't Safe
Despite the acronym, Simple Agreements for Future Equity (SAFE) aren't actually safe. In fact they were created specifically because early-stage company investing is so risky, investors needed a cheap alternative to other investment contracts.
The Creation of SAFEs
When companies raise capital from angel investors, they sometimes do it in the form of convertible debt; a loan backed by the equity in the company and convertible into common stock at some point in the future. Using debt, however, subjects the company to a number of regulations and limitations. As a result, there is significant legal costs for all parties involved.
Since angel investors expect a huge percentage of the start-ups they invest in to go bankrupt, they bet on a large number of companies to hedge their risk. Each time they invest, though, the investors have to pay for the legal and regulatory costs of entering into a convertible debt agreement. the angels got tired of this.
SAFEs were created to provide a simple agreement between the investor and the start-up that didn't have the same regulatory and legal review costs that the debt instruments had. Since no loan is created, the SAFE effectively becomes a contract between the two parties, greatly reducing the legal costs of entering into the agreement.
If you are crowd investing, you may be signing a SAFE
A SAFE is simply a contract that details the agreement between the investor and the company. At their core, SAFEs state the investor is investing capital in the company and, in exchange, the investor receives the ability to own stock in the company at a later date when the company does a more sophisticated equity financing round. Specific questions such as how much equity does your initial investment buy you, how much stock you can purchase, and if you can purchase even more stock at that later date should all be answered within the contract.
Understand the SAFE
The crowdfunding portal will likely have a simple explanation of how a typical SAFE contract works on their site as well as an explanation of the specific investment's SAFE. Unfortunately, the courts will rely primarily on the actual document you sign, and not these plain-English explanations. Before investing, you should hire your own lawyer to review the SAFE agreement and have them explain the terms to you.
Once you have your lawyer's input, you can use that same input for future investments by reviewing the SAFE contracts yourself to see if they match. If there are differences between the new SAFE and the one you had your lawyer review, get another review by your attorney.
Sample SAFE Documents
So that you can see what a SAFE agreement looks like, here are a few sample ones made available by Y Combinator, a seed investment firm in California which created the original SAFEs. These are sample SAFE documents, and may not be representative of the agreement you are expected to sign when crowd investing. Make sure to get legal advice from an attorney on the actual document the crowdfunding portal provides for the investment.
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