Crowdfunding has taken off in recent years. Still, there’s a lot to learn about the various investment opportunities and the security types available. Today we’re going to look at SAFEs to answer the question, “What Is The SAFE Security?” and to determine if they’re An Amazing Opportunity Or Just A Gamble.
We’ll talk about what a SAFE is, who it was designed for, why so many crowdfunding deals use SAFEs, and if they’re bad for investors in general. By the time you’ve finished reading this, you should be better prepared to analyze an opportunity and see if it’s a good fit for your investment strategy and portfolio.
I’ll finish off with my personal opinion on SAFEs and ask for your thoughts and feedback.
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What Is The SAFE Security?
Basically, it’s an agreement between the issuer (raising company) and the investor providing the right to future equity when certain conditions are met without defining a specific price per share at that moment in time.
It’s similar to a convertible note, warrant, or IOU, where the IOU is “I’ll get you next time,” without really defining what that means as far as pricing is concerned. It will define the conditions that would trigger conversion events, however.
Who’s It Really Safe For?
The issuer. I want to be upfront about this right now. SAFEs tend to be issuer-friendly.
That doesn’t mean they’re terrible securities. It just means that the SAFE is really meant to make it easier for the issuer to get through hoops, over hurdles, and avoid certain gotchas.
There’s no debt involved. You own nothing at the time of investment. The end result can go several different ways.
Why Do So Many Crowdfunding Deals Use The SAFE Security Type?
SAFEs are so popular are many crowdfunding sites for the following reasons:
- They keep the CAP table clean (you don’t actually have equity in the company yet, so I don’t need to add you to the CAP table).
- It’s not a debt. There’s no interest rate, no maturity date, etc. This means SAFEs are not subject to debt regulations.
- It’s cheaper for the issuer. Because the regulations are less stringent, there’s a cost-savings associated with it.
- It’s almost one-size-fits-all. With a little tweaking, a SAFE can be made ready for any company to use.
In short, SAFEs were meant to simplify the fund-raising process. They’re a lot like convertible notes but with fewer complications for the raising party.
Are SAFEs Bad For Investors?
This is the real question. Are SAFEs bad for investors?
The answer is, it depends…
It’s all in the terms and, more importantly, the conversion terms.
There are, what I call, Unfriendly SAFEs. These safes have conversion terms that say something to the effect of “at the company’s discretion,” or contain terms that are highly unlikely to be met, such as “In the event, the company conducts an equity round that successfully raises $100M in exchange for <insert some ridiculous stock type here>, your shares will convert at xxx…”
That said, there are plenty of SAFEs out there with reasonable, or even favorable, conversion terms too. I like to see terms that say something to the effect of “In the event, the company conducts an equity round involving common shares that successfully raises $1M, your SAFE will either convert at the valuation cap or at the current round’s share price multiplied by the discount rate of X% (whichever is more beneficial to the investor).”
Pay attention to the liquidation and change of control terms too. I’ve seen SAFEs that say something to the effect of “If there’s a change of control event while your SAFE has not converted, the company will pay the investor 100% of their original investment.” Basically, that means, “If we IPO, we’ll give you your money back. Thanks for the interest-free loan.”
There’s a level of trust that comes with investing in SAFE’s… Do you believe the company will conduct a round that has the potential to meet the conversion terms (i.e., will the company conduct a round with common shares and a maximum raise amount over $1M or more)? If they don’t, you’ll never convert (unless there’s a liquidation or change of control event, etc., which have their own conversion terms).
Conclusion – Are SAFEs An Amazing Opportunity Or Just A Gamble
SAFEs can be a great investment, but there are things you need to consider before jumping in, just because you like the team or the idea:
- Are the terms reasonable?
- Do you believe the company will conduct a raise that will actually trigger your investment’s conversion clause?
- Are the change of control conversion terms friendly or more of a “thanks for your donation” situation?
I, personally, am not a fan of SAFEs in general. I have some investments in SAFEs, and one of mine even converted recently (it had friendly terms, so I am not surprised that it did). Still, I prefer equity outright or even a note with an interest rate, set maturity date, etc. At least then, I know I’m definitely getting something (assuming the company doesn’t fold).
For now, I invest in SAFEs only if I really believe in the product or service and team and that I believe the company will convert it down the road.
I’d love to hear your thoughts on the SAFE security type. What do you like? What do you dislike? Am I being too harsh? Is there something I missed? Are SAFEs An Amazing Opportunity Or Just A Gamble? Let me know by commenting below.
I hope you enjoyed this article, “What Is The SAFE Security,” and that you learned something from it. Please share your thoughts and opinions in the comment section.