Credits: Y Combinator
Y Combinator Partners: Carolynn Levy & Kirsty Nathoo Carolynn and Kirsty co-authored SAFEs in 2013. They also handle a majority of Y Combinator’s legal operations.
SAFE agreements are ideal for early stage investing – they’re faster and easier than selling actual stock.
It makes sense that information and voting rights aren’t covered with these agreements – it’s not stock yet. When the contract converts into preferred stock, SAFE investors will piggyback on the same rights that the lead investor in the priced round negotiates (alert: SAFE investor perk!)
SAFEs that include pro-rata rights give investors the right to buy more stock in future rounds to maintain their percentage ownership of the company.
On Wefunder, an investor usually gets pro-rata rights if they invest a certain amount much higher than the investment minimum (ie. $25,000).
Different versions of the SAFE agreement cover special situations. SAFEs which include a discount allow investors to negotiate a discount rate rather than the valuation cap. Some SAFEs include both a discount and a cap.
As the name suggests, uncapped SAFE agreements don’t have a target valuation nor a discount. This means there is no extra reward to sweeten the deal for early investors. This type of SAFE is often seen when a company has extreme demand and investors want to be as flexible as possible to get in on the action.
Lastly, there is a Most Favored Nation (MFN) SAFE which is uncapped but has an MFN clause stating that if a later investor negotiates a target valuation or a discount, then you get to amend your SAFE to take those same terms.
On Wefunder, you may find a SAFE with both a cap and a discount. While this seems like a double win for investors, the discount is only ever applied if the company is valued at lower than the cap in the next round of raising… which rarely happens. So, it's more like a safety measure than anything for the SAFEs which include both on our site.
The number of shares you will eventually own is the investment amount divided by the price per share.
When a SAFE converts, the number of shares you get is equal to their investment amount, divided by the price per share. The price per share is equal to the valuation divided by the capitalization. What is the capitalization? The capitalization is the sum of the issued shares, the increase in the options pool, and the shares that the SAFEs have converted into.
As a SAFE investor, you don’t know the exact percentage of ownership you will end up with upon investing.
A price round can bring major changes. During a homerun merger, you can choose to convert your SAFE to common stock and participate in the proceeds of the merger. If an acqui-hire occurs and the company’s talent is bought, you can opt to just have your SAFE paid off. If the company fails altogether, your SAFE allows you to be in line before stockholders to get a payout (if there’s any money left for payouts).
If a company that raised on Wefunder is acquired, the campaign’s Lead Investor will decide how all of the SAFEs convert.
Be sure to confirm SAFE agreements through clearly stated emails or correspondence with the founder.
For traditionally issued (ie. non-crowdfunding) SAFEs, Y Combinator suggests a “Handshake Protocol” to formally start the investment process. Founders typically email you to confirm both the investment amount and the cap to which you would respond affirmatively. Backing out after this point would do serious damage to your investor rep!
You shouldn’t treat the nitty gritty of your SAFE like an iTunes Terms of Privacy–read through to verify that you’re signing the SAFE that you think you are! For non-Wefunder SAFEs, also double-check your signature block for accuracy.
Note that a SAFE isn’t valid until you actually wire $ and that delaying the wire can be a huge headache for a founder. Don’t sign unless you’re primed and ready to wire the money!
Here on Wefunder, we’ll label the agreement if it’s a YC SAFE.
Post-wire, don’t ghost from your founder! More often than not, they’ll appreciate your advice and guidance. That said, don’t overwhelm your founder either– you’ll only hinder their efficiency and, ultimately, the success of the startup.
An important note: you don’t need to be on the board of directors to be extremely helpful to the company & you’ll irk most founders trying to get yourself a seat.
When investing via any method, know your rights as an agreement holder and also the terms under which your contract will convert. Also, make sure you understand your ownership and where it actually comes from. Equipping yourself with this understanding will help you make smarter decisions and might protect you in the future.
Wefunder investors: be sure you really understand the type of contract a company is offering and what each of the key terms in that contract mean. Not to toot our own horn, but our FAQ is pretty freaking good and should help answer any contract-specific questions you might have. If it doesn’t, give us a shout at [email protected]!
Y Combinator Partner, Dalton Caldwell
In this video, Dalton touches on founder meetings, trusting your gut, learning how to properly say “no” (and “yes!”) to a company, and more.
In March of 2018, something big happened: the best startup investor on the planet shared its entire playbook. This investor also happens to be the world’s most famous startup accelerator, Y Combinator. From Airbnb to Doordash to Dropbox to Stripe, YC has funded many of the biggest startups you can name.
We wanted to put YC’s Startup Investor School videos right at the fingertips of our favorite people out there, Wefunder investors. To that end, we put in some crowdfunding and Wefunder-specific tid-bits, too.
While we are a YC Alum, Wefunder has no current affiliation with Y Combinator. So, many thanks to Y Combinator for all of the video material used on this page! They produced and own all of these wonderful videos while we wrote the summaries.
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