SAFE (simple agreement for future equity) Notes are a simpler alternative to convertible bonds. Launched in 2013 by Y Combinator, a Silicon Valley accelerator, they allow startups to structure start-up capital assets without interest or maturities. FAS are short, five-page documents. Valuation caps are the only negotiable detail. We also felt that the name of the instrument could be particularly misleading for retail investors. “A potential problem in the use of FAS in crowdfunding, we wrote, is that inexperienced small investors mistakenly think they are getting something simple and safe, a security they think they can use in all Silicon Valley startups and investors, and that they are making an investment without fully understanding the risks they are taking in buying these FAS.” The start-up (or another company) and the investor enter into an agreement. They negotiate things like: some issuers offer a new type of security as part of some crowdfunding offers that they have called safe. The acronym means Simple Agreement for Future Equity. These securities are risky and very different from traditional common shares. As the Securities and Exchange Commission (SEC) states in a new investor newsletter, despite its name, a SAFE offer cannot be “simple” or “safe.” A SAFE is an agreement between you, the investor, and the company in which the company usually promises to give you a future stake in the business if certain triggering events occur. Not all FAS is the same and the very important conditions for obtaining future equity may vary depending on the SAFEs offered in different crowdfunding offers. Despite its name, a SAFE should not be “simple” or “safe.” As a start-up, you come in agreement with other companies, suppliers, contractors, investors and many others. A lesser-known agreement is the Simple Agreement for Future Equity (SAFE).
These agreements can be important for the success of a startup, but not all SAFE agreements are equal. On May 9, 2017, the same day that the SEC issued its investor newsletter warning crowdfunding investors about the risks of FAS, Commissioner Michael Piwowar added his concerns about FAS in the public dialogue. Like counsel for the investors, Commissioner Piwowar contradicted the potentially misleading nomenclature. In short, he says, “despite its name, the so-called SAFE is neither easy nor “safe.” He added that crowdfunding portals “face a real challenge in informing potential investors about this complex and uns standardized high-risk security when the title itself is titled “SAFE”. Piwowar concluded his comment with a warning: “Companies and their intermediaries should think carefully about how they name or describe their securities. Titles that are marketed as “safe” or “simple” should be exactly that. Many people believe it is important for investors and founders to come together in the middle so that negotiations can work together for greater good. All tools must be safe and productive at both ends, so that investors can continue to invest and create developers.
Mohsen Parsa, a los Angeles start-up lawyer, helps clients understand SAFE agreements, design comprehensive SAFE agreements for clients, and provide general guidance and guidance to these types of agreements so that startup clients can make the best short- and long-term decisions.