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
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).
There are two main variations of the SAFE.
Y Combinator initially developed the SAFE for
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:
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
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
Learn more about convertible notes.
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
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
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
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.
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:
To preview a sample, download the Wefunder Promissory Note
This is a promissory note that is paid back from a share of the revenues of the business.
Important terms in this note include:
To preview a sample, download the Revenue Loan 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
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