I am an investor and have a SAFE note to sign. what should i look for?

Hi *****, my name is Dolan, and I’d be happy to help with this. I carefully review each question and provide responses based on my years of hands-on experience as a lawyer.

SAFE notes are popular for startups, but there are a few key details to look at before signing. Do you have the note on hand, or would you like me to outline general areas to focus on first?

I understand, and early-stage investments can certainly carry risk. Let’s break it down. The most critical areas to review in your SAFE note include: 1. Valuation Cap: This sets the maximum price at which your investment converts into equity. Do you see a valuation cap listed? 2. Discount Rate: This is the percentage discount you’ll receive on future equity. Check if it’s reasonable compared to market standards. 3. Trigger Events: These are the events that convert your SAFE note into equity - like a funding round or acquisition. Are these clearly defined? 4. Investor Protections: Look for any clauses about pro-rata rights or information rights.
If you can share what’s in the document, I can walk you through specifics.

Thanks for sending.

Those terms are fairly standard for SAFE notes. Let’s dig a little deeper: - A $5 million valuation cap is good if you believe the company could grow significantly. It means you’ll secure equity at that cap regardless of how high the company’s valuation is during conversion. Do you think $5 million reflects the company’s current potential? - A 20% discount is also typical. This ensures you receive equity at a reduced price compared to other investors during conversion. - The trigger events look clear.

One question: Do you know if the company is close to raising the $2 million funding round?

It’s great that you trust the founders...that’s often a key part of investing in early-stage startups. Here’s another important consideration: SAFE notes don’t guarantee repayment if the company doesn’t hit a trigger event or fails entirely. Do you have a clear understanding of the company’s financial health or burn rate?

Absolutely. Before signing, you should request: 1. Current Financials: This includes their cash flow and runway. 2. Revenue Projections: If they’ve shared projections, ask for context and how realistic are they? 3. Business Plan Updates: Are they making progress toward milestones, or are there delays? Understanding these aspects can help you assess whether the company is likely to hit the trigger event for conversion.

Great question. Here’s what to look for: 1. Pro-Rata Rights: These let you maintain your ownership percentage by participating in future funding rounds. Does your SAFE note include this? 2. Information Rights: These give you access to company updates, financials, and other key information. 3. Most Favored Nation (MFN) Clause: This ensures you get the same terms as any better deal the company offers to future investors under a SAFE. Do any of these terms appear in your note?

It’s good that pro-rata rights are included since that’s a strong protection for investors. If information rights aren’t specified, you might want to request them. They ensure you’re kept in the loop as the company progresses. For the MFN clause, it’s worth confirming. If it’s missing, consider asking for it. It protects you if the company offers better terms to future SAFE investors.

Yes, always in writing. If you want to request changes or additional terms, you can propose amendments to the SAFE note. This is common and shows you’re doing your due diligence.
Would you like guidance on how to phrase your request to the founders?

Understood. You can frame it collaboratively, like this: “I’m excited about the opportunity to invest in your company. To make sure everything is clear and aligned, I’d like to propose a few updates to the SAFE note: 1. Adding information rights to ensure I stay updated on the company’s progress. 2. Including an MFN clause to maintain parity with future investors. Let me know your thoughts because I’m happy to discuss further.” Does that sound like something you’re comfortable saying?

If they reject the changes, you’ll need to decide if the current terms align with your risk tolerance. Here are some options:< 1. Proceed as Is: If you still feel confident about the founders and the business, you can move forward. 2. Negotiate Further: If one or two terms are particularly important to you, focus on those and explain why. 3. Walk Away: If the risks outweigh the potential rewards, it’s okay to decline the investment. Would you like help weighing these options?

I’m glad to hear that! My goal is to make sure you feel confident in your decisions. If you have any other questions about the SAFE note or investing in general, feel free to reach out. If you’re happy with the advice I provided, I’d really appreciate a review since it helps others find the right legal help.

You’re welcome. Best of luck with your investment!