Which startups should use a Wefunder SAFE?
The Wefunder SAFE is designed for a technology startup raising under Regulation Crowdfunding, that intends to eventually raise venture capital.
Inspired by the Y Combinator Agreements, a SAFE (Simple Agreement for Future Equity) grants an investor the right to purchase equity at a future date.
It looks like this on the profile:
Unlike a convertible note, a SAFE is not a loan. As such, it does not accrue interest or have a maturity date. This makes things simpler and negates much of the need to amend the agreement in the future. For example, it helps startups not waste time extending maturity dates or revising interest rates, if a Series A financing takes longer than you first expect. It also better aligns with the intention of most equity investors, who never intended to be lenders.
We feel Regulation Crowdfunding requires a SAFE with several extra protections not common in Regulation D fundraises with accredited investors. The Wefunder SAFE:
- Has Repurchase Rights. The company may opt to repurchase an investor's SAFE prior to conversion at Fair Market Value if the 12(g) reporting requirements are triggered. Fair Market Value is determined by an appraiser the company chooses.
- Can be Amended by One Lead Investor. The lack of a maturity date and interest rate negates the need for common amendments of convertible note financings. However, if an extraordinary situation requires an amendment, you will not be required to chase down hundreds of signatures. The company designates a Lead Investor Representative, and all investors agree to allow that person to unilaterally amend the SAFE.
- Grants CEO Power of Attorney for Minor Shareholders. Once the SAFE converts into equity, investors who are not Major Shareholders grant the then-current CEO a power of attorney to vote all shares and execute any documents on their behalf. This mitigates the potential problem of hundreds of minor shareholders slowing down follow-on financings.
Investors Represent They Follow Investment Limits. All investors indicate if they are accredited or unaccredited. They represent they are in compliance with the investment limitations of Regulation Crowdfunding.
The following terms are customizable:
- Valuation Cap. The Valuation Cap is the most important term. It entitles investors to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent financing. Typical Valuation Caps for early-stage startups currently range from $4 million to $20 million.
- Discount Rate. The default is 0%. This term is now rarely used and not recommended unless a major investor asks for it. It gives investors a discount on the price of stock, when the pre-money valuation is less than your valuation cap. Typical discounts range from 0% to 10%.
- Governing Law. We default to Delaware, but you may change to any state.
- Major Shareholder Threshold. The default is $25,000. Accredited investors investing greater than this amount have voting rights and do not grant the CEO a power of attorney.
- Pro-Rata. By default, Major Shareholders have pro-rata rights and therefore have the opportunity to maintain their ownership share in subsequent financings. You may disable pro-rata rights for all investors.