Tamara Thompson, founder of Thompson Legal Advisory Services P. C and her colleagues, William Falor and Cullen Schlievert, joined me for a fireside chat at the Angel Club to share their decades of experience in venture capital and private equity financing. Tamara and her team have advised numerous clients in the US and across Europe on mergers and acquisitions, divestitures, seed and venture capital financings, private equity and debt transactions, as well as start-up and general commercial matters, and sat down with me to share the advantages of using a SAFE, and how they may benefit you in the current market.
The Simple Agreement for Future Equity (SAFE)
In recent years, the Simple Agreement for Future Equity (SAFE) has become a widely popular avenue for startups to raise funds from investors. According to Bill, a SAFE is, “...an agreement that your company makes with an investor that in, in exchange for a cash payment, your company may provide either cash or stock back to the investor. What ends up being provided simply depends on what happens after you give that cash payment.”
A SAFE offers benefits for both startups and investors, including flexibility, simplicity, and reduced risk. If you are a startup looking to raise funds, or an investor looking to invest in early-stage startups, a SAFE could be the best route to achieve your goals.
Benefits of a SAFE for Startups
One of the main benefits of a SAFE for startups is that it allows you to raise funds without giving away equity in your company. This means that you can avoid the traditional approach of selling equity in exchange for funding, which can be costly and time-consuming.
Additionally, SAFE’s don’t require startups to determine a valuation of their company, which can be difficult for early-stage startups that have not yet generated revenue. SAFE’s also allow startups to attract investors who are interested in supporting the company's growth, without the burden of providing them with immediate voting rights or other control over the company. This means that you can retain control over your company while still raising funds from investors who are aligned with your vision.
Tamara says that SAFE’s have “...become the industry standard. They are quick, they are easy, and we have found that when people start to try to blend the pre-money and the post-money to adjust those economics, timelines dried out, legal fees draw out, and it gets really complicated really fast.”
Benefits of a SAFE for Investors
For investors, a SAFE provides an opportunity to invest in early-stage startups without the risks associated with traditional equity investments. According to Bill, there are three possible outcomes for an investor, “Number one, the investor might receive preferred stock in your company. Number two, they might receive some money in connection if your company gets sold, or three, they might receive their money back.”
Unlike equity investments, which provide investors with immediate ownership in the company, a SAFE provides investors with the right to obtain shares in the company in the future in the event of a financing round or sale of the company. This means that investors can potentially benefit from the growth of the company without the risk of losing their investment if the company fails.
Another advantage of SAFE for investors is that it provides them with flexibility in terms of their investment. Unlike equity investments, which require investors to negotiate the terms of the investment with the company, a SAFE provides investors with a standardized agreement that can be easily understood and executed.
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Benefits of a SAFE in the Current Market
From Cullen’s perspective, “...there has been a considerable slowdown [in the market], it seems like everybody is conserving cash, and I think that's both the investor and the company. On the investor side, they're making sure their portfolio companies are taken care of, and on the other side it’s a wait-and-see game.”
While it seems that investors aren't making a ton of deals, Cullen says that “...there are still investors making those investments, but they're trying to reduce costs, and one of those big costs can be drawn out legal fees in negotiations, and that makes a SAFE beautiful. You can get the money quickly and focus on building your company.”
Seeking Advisors
The simplicity and flexibility of a SAFE make it a widespread option for both startups and investors. However, as with any financial instrument, there are both advantages and disadvantages to using SAFE. It’s important to carefully consider your financing options and consult with legal and financial professionals before making any decisions.
Tamara is a mentor here at Angel Club and can be available for mentorship opportunities, or to answer any additional questions. Book a session with her here to chat through your options and discover what works best for you!
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