Background
The Y Combinator, a California based seed level investor that operates a hybrid incubator/start-up accelerator out of Mountain View, CA, released sample documentation and templates for a new type of equity investment agreement. Promoting the use of a new method for startups to structure agreements by and between a start-up and an investor, Y Combinator is proposing the adoption of a unique and novel approach of capital raising, a Simple Agreement for Future Equity (“SAFE”) purports to be a flexible, malleable and almost entirely unregulated method or vehicle for angel/early stage/seed level investing by offering both investors and start-ups alike a basic, clear and “simple” investment proposition or offer. While this is not a new concept, it is one that has not received much attention in New York.
The Short Summary
Start-up to investor, “please invest CASH MONEY, YO! In exchange for equity (common or preferred stock or membership certificates) upon the occurrence of ANY defined event that we can all agree to.” Why? Because it is easier, simple and straightforward enough to reduce legal costs, avoid regulatory issues and allows for a substantial amount of creativity.
My View As A Securities Lawyer
A SAFE is an interesting, appealing and novel approach to angel or seed level investing. If it can in fact minimize legal costs, permit a company to avoid difficult VCs and give both sides enough room to play in a sandbox filled with their own rules, it very well may be an excellent choice and coming to a city near you. The Y Combinator describes a SAFE, generally, as follows:
An investor makes cash investment in a company, but gets company stock at a later date, in connection with a specific event. A SAFE is not a debt instrument, but is intended to be an alternative to convertible notes that is beneficial for both companies and investors.
Whether or not it is a debt or equity instrument, it is a security – an important thing to keep in mind. As the Y Combinator states, a SAFE is a “one-document security . . .” Debt instruments are subject to state and federal laws, rules and regulations. Attempting to draft or enter into such an agreement without the advice of counsel is likely to result in negative consequences for all those involved – whether intended or not.