What is a SAFE Offering? Pros and Cons, Key Terms, and Legal Support
A SAFE (Simple Agreement for Future Equity) offering is when an investor injects capital into a startup company, for which they will receive equity in the future. This usually occurs at a specific time, such as when the startup earns funds or goes public.
Read the rest of this article to explore SAFE offerings in greater detail, such as their benefits, legal requirements, the key terms that appear in a SAFE agreement, and how a lawyer can help you with SAFE offerings.
What are Pros and Cons of SAFE Offerings?
There are advantages and potential pitfalls of SAFE offerings. Here’s what to know.
Pros
- They’re easy to execute. You don’t have to spend a lot of time negotiating and the paperwork is less complex than that of traditional fundraising. A SAFE agreement is a short document.
- Investors get early access to company equity. They can lock in the right to purchase equity on more favorable terms than later investors.
- Investors can receive promising returns. As long as the company performs well, a SAFE offering can be a valuable investment. This is especially the case for early investors whose notes will become equity at lower valuations.
Cons
- Investors aren’t guaranteed returns. If the startup company doesn’t perform well, the investor might lose their investment.
- There might not be a triggering event. Since equity is converted when a triggering event happens, such as a merger, this might never happen. Since a SAFE offering isn’t a loan, the investor won’t get their money back.
- There’s a risk of dilution. If the company raises money by using multiple SAFE deals without a priced funding round, this can result in reduced ownership shares for founders and early investors.
What are Legal Requirements for SAFE Offerings?
SAFEs are securities, which means that when companies offer them they have to ensure they’re aligned with all state and federal securities laws. This requires them to use a Regulation D exemption and file a Form D with the U.S. Securities and Exchange Commission (SEC).
This filing has to be done within 15 days of the first sale. In some states, there are other state law requirements that need to be completed.
What are Key Terms in a SAFE Agreement?
A SAFE agreement usually contains key aspects and terms that outline the offering. These include the following:
- Valuation cap: the maximum company valuation at which the investor can convert their funds into equity. If the company’s valuation turns out to be higher than the SAFE’s value cap at its next funding round, the SAFE converts into equity at a price that’s lower than what they paid, rewarding the investor with more shares for their money.
- Discount price: the percentage of the share price that’s discounted for the SAFE holder at the next funding round.
- Pre-money SAFE: Investor ownership is calculated according to the company’s valuation prior to the funding round.
- Post-money SAFE: Investor ownership is calculated after all SAFE money is included, making ownership more transparent.
- Most favored nation (MFN): a clause to protect investors. It gives the investor improved terms should the company issue a new SAFE with more favorable terms.
What to Look For in a SAFE Offering Agreement?
Since SAFE offering terms can, and should, be customized, you can’t expect them to be generic. Investors should conduct due diligence to scrutinize the company’s disclosure and all terms included in the SAFE agreement. Here are some top things to look for.
- Conversion terms. The SAFE agreement needs to define the type of equity and potential adjustments that will be made to the conversion terms.
- Rights. As an investor, you want to check what rights you’ll have. This might include access to company information or taking part in some company decisions.
- Negotiation. If you’d like to change some terms in the agreement, you’ll want to see if the agreement contains flexibility for discussions.
- Exit strategy. The agreement should match your exit strategy.
- Pro rata rates. This clause is essential because it gives investors the opportunity to invest in future rounds of funding to maintain ownership, potentially providing long-term benefits.
- Conversion triggers. As an investor, you want to know exactly when conversion to equity will occur. If there’s vague wording, there could be hidden risks.
How Can a Lawyer Help You with a SAFE Offering?
If you’re new to SAFE offerings, it’s worth consulting a professional lawyer who can help you with their skill and experience. Here are some specific ways in which they will assist you through the process.
- They can review your SAFE agreement so that it’s customized, fair, and has favorable terms.
- They’ll interpret the SAFE structure so you understand everything in plain terms.
- They’ll explain dilution scenarios so you know how ownership could change in the future.
- They’ll spot any vague terms that could put you at risk.
- They’ll negotiate any unfavorable terms with the company.
- They’ll assess how the SAFE offering can fit into your investment goals.
- They’ll check that the SAFE offering and agreement is aligned with all regulations and securities laws.
- They’ll ensure that the SAFE agreement isn’t in conflict with other essential documents.
- They’ll advise you on how to avoid potentially risky mistakes before agreeing to the terms.
Where to Get a Review of Your SAFE Agreement
Online legal platforms make finding a qualified lawyer to review your SAFE agreement simple. On ContractsCounsel, an online legal marketplace that connects clients with vetted lawyers, you can request a legal review of the contract online and a professional, experienced lawyer will assist you.
- Go to the ContractsCounsel marketplace platform.
- Post your request for free. Include a few details of what you need.
- Wait for lawyer bids from lawyers on the platform.
- Review the lawyers’ profiles for information about their location, expertise, experience, client ratings, and credentials.
- Select the best lawyer for your requirements and hire them.
