SAFE (Simple Agreement for Future Equity)

First developed by Y Combinator in 2013, a SAFE grants an investor the right to obtain equity at a future date if the startup sells shares in a future financing. It has been historically used by top startups in Silicon Valley raising money from accredited angel investors. You should only invest under a SAFE if you believe that the startup can raise financing in the future from professional investors.

SAFEs are used by early stage startups because they delay the difficult task of figuring out how much a startup is worth. It is also a much cheaper and simpler contract than priced equity rounds, which may require months of negotiation and upwards of 30 pages of legalese costing tens of thousands of dollars.

The number of shares you receive is determined at the next priced financing, when professional investors - typically venture capitalists - set the price for preferred stock. Then, calculated by using the and sometimes the , your SAFE often converts into shares at a lower price than the venture capitalists paid, since you invested earlier.

The is the most important term in this security. It puts a maximum price on the price of the stock - the lower the price, the more shares you will get. If you invest in a startup with a valuation cap of $8 million, and they later raise at a $20 million , the amount of stock you'll get will be priced off the $8 million number. But, if the next investors value the company at $4 million, that will be your price instead (perhaps further discounted by the ).

Unlike a Convertible Note, a SAFE is not a loan. As such, it does not accrue interest, have a maturity date, or have a legal obligation to be paid back. This makes it a simpler and cheaper way to finance a startup, and it typically better aligns with the intention of most early stage equity investors who never intended to be lenders (convertible notes are rarely if ever paid back in cash despite being a debt instrument - the startup just goes bankrupt).

Further Reading:

• Read the SAFE Legal Primer
• SAFEs Compared to Convertible Notes
• SEC Investor Bulletin

There are two main variations of the SAFE.

Y Combinator SAFE

Y Combinator initially developed the SAFE for investing under Regulation D offerings. Most startups who use this variant only intend to accept funding from perhaps a dozen rich investors, or through many investors investing via a WeFund SPV.

Wefunder Crowdfunding SAFE

Accepting funding from hundreds of direct online investors investing as little as $100 requires a SAFE with several extra protections not common in Regulation D fundraises with . The Wefunder SAFE treats Major Investors (typically defined as investing between $10,000 and $25,000) much like the Y Combinator variation, but it has no voting rights for Minor Shareholders.

The Wefunder SAFE:

• Has Repurchase Rights for Minor Shareholders. Except for Major Shareholders, the company may opt to repurchase an investor's SAFE at any time prior to conversion at the greater of the purchase amount or the Fair Market Value, as determined by an appraiser the company chooses. Startups want this because they are scared that venture capitalists may not fund their companies at a later date because they have a "messy cap table".
• Can be Amended by One Lead Investor. The lack of a maturity date and interest rate negates the need for common amendments of convertible note financings. However, if a particulary complex issue in a follow-on financing requires an amendment to the SAFE, founders are scared they'll be unable to chase down thousands of signatures. The company can designate a Lead Investor Representative, and all investors agree to allow that person to unilaterally amend the SAFE. But that person may not change the .
• Grants CEO Power of Attorney for Minor Shareholders. Once the SAFE converts into equity, investors who are not Major Shareholders grant the current CEO a power of attorney to vote all shares and execute any documents on their behalf. This mitigates the potential problem of hundreds of minor shareholders slowing down further follow-on financings.

Convertible Note

A convertible note is an unsecured loan that converts to stock at some point in the future. They are one the most popular forms of seed-stage startup investing because of their history, although the SAFE is rapidly becoming more prevalent.

Convertible notes are also useful because they delay the difficult task of figuring out how much the startup is worth. The number of shares you receive is determined at the next qualified financing (typically $1 million), when venture capitalists set the price for preferred stock. Then, calculated by using the , , and , your loan converts into shares at a lower price than the venture capitalists paid, since you invested earlier.

If the startup does not raise another round of funding, the note becomes due at the maturity date, typically in 18-24 months. Convertible notes, however, are rarely repaid in cash. Instead, the note usually converts to equity at a pre-set target price.

The discount and interest rates have a relatively minor impact on future returns. The most important term to focus on - which can greatly impact the price of your future shares - is the . This is usually set between $3 to $20 million, depending on how "hot" the startup is.

Learn more about convertible notes.

Priced Preferred Stock

Only a few years ago, legal fees cost upwards of $50,000 to properly set up a stock financing. It was uneconomical to pay this amount unless venture capitalists were investing millions in a . Nowadays, some startups can use open-sourced "priced round" documents to reduce the costs of a stock financing at the seed stage.

There are a host of terms that can be negotiated in a stock financing, but this is done by the "lead" investor, who typically invests upwards of $200,000.

As a non-lead investor investing a small amount, the most important terms to pay attention to are the or the . This is effectively what the company is considered to be worth, and with it, you can calculate your percentage ownership. Comparatively, the price of the stock is relatively meaningless.

One of the most popular open-sourced priced round agreements is the Series Seed, developed by Fenwick lawyer Ted Wang.

Read more about Series Seed
Learn more about terms

Loans & Promissory Notes

High-growth startups almost never raise seed-stage funding with loans, as debt doesn't offer enough of a return to account for the risk investors are taking.

However, loans or promissory notes can be more appropriate for small businesses. One benefit of investing with a loan is that the investor often receives cash every quarter or year, as the principal is repaid alongside the interest rate. The downside of debt is you have no equity stake if the company suddenly becomes much more valuable.

Wefunder Promissory Note

Many businesses on Wefunder use our template agreement. The Wefunder Promissory Note is good for debt fundraises that don't require much complexity. It can be powerful for crowdfunding when combined with the Investor Perk Agreement. It may also be paid back by the company at any time.

Important terms in this note include:

• Interest Rate. The interest rate per annum.
• Maturity Date. How many years until the loan is fully paid back?
• Quarterly or Annual Dispursement. Companies choose to make annual or quarterly payments.
• Grace Period. By default, these loans are deferred until 30 days after their crowdfunding deadline date. Some businesses may defer the start of their loan at a later date, such as when their business is scheduled to open.
• Defer Payments. By default, every company can miss one payment without being in default. This is meant to allow businesses time to recover if they have a bad year.
• Secured. Some loans may be secured with all property of the business.
• Personal Guarantee. Some loans may have an individual that personally guarantees payment.
• Subordination. Some loans are subordinate to a major bank lender.

To preview a sample, download the Wefunder Promissory Note

Revenue Loan Agreement

This is a promissory note that is paid back from a share of the revenues of the business.

Important terms in this note include:

• Gross or Net Revenues. Net revenues excludes returns or shipping costs.
• Revenue Percentage. This is the percentage of revenue that is shared.
• Repayment Amount. Typically 1.5-3.0X, this is the maximum amount you will be paid back.
• Quarterly or Annual Dispursement. Companies choose to make annual or quarterly payments.
• Defer Payments. By default, every company can miss one payment without being in default.
• Secured. Some loans may be secured with all property of the business.

To preview a sample, download the Revenue Loan Agreement

Subscription Agreement

On Wefunder, a subscription agreement is a contract between you and a WeFund SPV managed by Wefunder Advisors.

Most startups on Wefunder using Regulation D do not allow you to directly invest small amounts in their company. Instead, you are able to invest in a WeFund, which aggregates all the small-dollar investments, and invests in the startup as one shareholder. The WeFund holds the underlying security (such as a convertible note, stock, or loan).

When you invest in a Wefund via a subscription agreement, you only have an economic interest - you have no voting or information rights in the startup the fund invests in. You also can't sell any shares in the startup. Wefunder Advisors manage the fund on your behalf and decides when to sell the securities (typically, when the startup is acquired or goes IPO). Only then do you earn a return. This is a very long-term investment. For instance, if you had invested in Facebook in 2004 with a WeFund, you would have had to wait 8 years later until they went public in 2012, to receive a return.

Read the WeFund SPV FAQ