So you’ve discovered some online public offerings and are now scouring the internet for down low on the JOBS Act investment opportunities. Maybe you’ve noticed that some companies are offering SAFE securities (which is inherently misleading). SAFE is actually an acronym for Simple Agreement for Future Equity which is often very attractive to early stage startups seeking seed investments as it allows for wiggle room in both future raises and, unfortunately, company accountability. When you invest in SAFE securities you actually don’t own any equity in the company and you won’t be eligible to own any equity unless certain conversion criteria are met (This is where things get convoluted). Any company offering SAFE securities is free to determine their own criteria which can be awfully complex with legal jargon and often include outrageously inflated future growth or valuation expectations.
Things You Should Know
Risk of the investment is much higher as typically seen with any seed investments
SAFE investments should not be mistaken as debt investments since this type of security is not legally required to be paid back.
No expiration/maturity date or interest.
Typically, as an investor in this type of security you don’t have any voting rights within the company.
It’s usually easy for the company to repurchase your SAFE securities back at the ‘fair market price’.
Look out for clauses regarding what happens if the company dissolves and ensure you’re okay with the outcome if the company fails before deciding to invest.
It’s unlikely that you’ll ever be able to find any sort of liquidity from owning SAFE securities especially if the company doesn’t have additional formal raises planned.
Selling SAFE securities requires a company to be incorporated and not an LLC
The most common conversion criteria are Next Equity Financing (aka future equity raises) or sale of the company.
Betting on the Future
Ensure you understand 100% of the company's investment terms submitted to the SEC in their filing documents and what things would need to happen to convert your SAFE to actual equity/stock.
If you’re investing a large amount it may be worth having a financial adviser, industry consultant, or possibly even a lawyer friend help ensure you fully understand what the stock conversion criteria are.
Do you trust the team’s capabilities to be able to meet the conversion criteria? Have you researched each core member online (LinkedIn)? The team is arguably the most important factor when considering investing in SAFE securities since they are the make or break point on whether the company achieves their conversion criteria.
Ask yourself and do a bit of research on whether the valuations and criteria are reasonable given the market size.
You should research actual market size and projections yourself to ensure that the claims made aren’t falsely inflated.
If you still don’t understand the conversion criteria please ASK the company. Under the JOBS Act Title III companies are required to make communications with potential investors public on their funding portal page. This is the best place to ask the hard questions and hold these companies accountable to the answers.
Look for reviews! If real people, but not press necessarily, are already talking about the product a lot in online communities it’s a good indication that the demand is there.
Does the company provide a cap table? Does it make sense? (TechCrunch on why this is so important with SAFE investing)
Skeptics Weigh in About SAFE Offerings
We challenge you to try Googling “Simple Agreement for Future Equity” and you’ll find a barrage of articles with an optimistic outlook from the startups’ perspective versus an uncomfortable and pessimistic perspectives from investors, law firms, and financial advisers on these risky offerings. Basically it all comes down to the startup benefiting much more than the investor. If you’re a startup considering SAFE securities you should have a very deep understanding of your cap tables, a tentative 5-year plans, and seek lots of unbiased external advice. According TechCrunch one of unexpected consequences of these SAFE securities is “much more dilution than the issuers thought when they signed those documents”.
SAFE Securities Are NOT Equity
At EquityBrew we believe that investing in equity securities are far superior to investing in SAFE securities and promise to our readers that all offerings featured will exclusively be equity offerings.
Know Your Stuff
Stilling considering investing in SAFE offerings? We plead for you to read this article by the Virginia Law Review before making your decision.
We recommend heading over to FINRA’s website for their wonderful article “Be Safe—5 Things You Need to Know About SAFE Securities and Crowdfunding”.
Are you a company considering SAFE a offering? Make sure you've calculated your cap table correctly with these handy tools.
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