Cracking open the SAFE

I see Antone Johnson and Joe Wallin are tweeting about the "SAFE," or "simple agreement for future equity") being promoted by Y Combinator as a seed-financing alternative to convertible notes.

6901756969_dcb05eac80_zThe animating idea appears to be to take the pressure off a startup to close on a priced equity round before a slew of seed fin ancing convertible notes mature.

What does a purchaser of a SAFE get? A promise that future shares will be issued on triggering events that the SAFE agreement defines.

There are four varieties of the instrument indexed on the Y Combinator site. I've had a quick look at this one, a version that imposes a valuation cap and gives the SAFE purchaser a conversion discount. A few things stand out:

  • The size of the SAFE round is not scoped; I suppose this simply reflects a Y Combinator and perhaps Silicon Valley philosophy of open ended rounds, with notes (or SAFEs) being issued with different discounts at different times. (A byproduct of this approach is that you have to get each investor to individually agree to any change in terms; maybe this is not so bad here, as the investor really has no downside protection to give up.)
  • Unless I missed it, I don't think the SAFEs convert into convertible note rounds, if the company later determines to issue convertible notes before a conversion-triggering equity round. Nor is there a covenant restricting the company from issuing convertible notes without consent.
  • Investors do get the benefit of a few key company reps, but there is no capitalization rep, no rep as to founder reverse vesting, and no rep that everyone has signed an inventions agreement (though there is a rep that the company has the IP it needs).
  • There seems to be an appetite to put off corporate approvals to authorize offerings, make reservations of shares, and make appropriate Reg D filings; I think a sophisticated investor is not going to be comfortable with that (even assuming she is willing to get past the threshold problem of not having any priority over the common stock).

The above from a quick read just after seeing Joe's and Antone's tweets. LMK if you see anything I missed.

Photo: Dennis van Zuijlekom / Flickr.

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