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DEBATING THE “S” IN S.A.F.E

by David Cykiert

Conclusion

This article is a series of opinions and run-on sentences. If you elect to skip the remainder, the conclusion is this: the “s” should be removed from “SAFE,” leaving it, instead, as the “AFE”.

The SAFE.

The SAFE financing. The “easy” way to raise early money. Thank heavens for the SAFE. A simple agreement for future equity. A metaphorical utopia of early-stage corporate finance where investors and entrepreneurs co-exist on the surface, with all cards exposed. Relax, put your feet up, crack a hard seltzer, its just a SAFE.

Reminds me more of Bob Dylan’s experience on a Bear Mountain Picnic.

Why a SAFE?

Google “why use a SAFE (agreement)”. My modest machine shows 23,200,000 results in 0.64 seconds. Having read every single one of those 23million+ entries, I can summarize; (i) no maturity date or accrued interest, and (ii) easier. Y Combinator takes credit for having introduced the SAFE.

They claim:

“As a flexible, one-document security without numerous terms to negotiate, safes save startups and investors money in legal fees and reduce the time spent negotiating the terms of the investment. Startups and investors will usually only have to negotiate one item: the valuation cap. Because a safe has no expiration or maturity date, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like.” (https://www.ycombinator.com/documents/)

To be fair, the Y Combinator version is about the simplest version I’ve seen. But like a game of telephone among esquires, the SAFEs I see most often are a far cry from their original appearance. By the time you receive one, they’ve been so heavily manipulated that the concept of “nothing to negotiate” is nonsense. To give proper credit, Y Combinator has developed multiple SAFE versions which tailor to a variety of different circumstances: valuation cap but no discount; discount but no valuation cap; both; neither. Why people are prone to venture from what works escapes me. But they do. Call it “venture capital.”

Case Study.

A client called me last week and asked me to review a SAFE that would govern their investment into a very early-stage company. Should be “Simple”. But sure enough, here I am staring down the barrel of a hacked up SAFE, and it is complicated.

To begin with, sorting through a SAFE requires a lot of patience and three monitors. The definitions are scaffolded: to calculate the Conversion Price requires you figure out the Discount Price and the SAFE price. And do you apply the Liquidity Capitalization or the Company Capitalization? Don’t forget to account for the Unissued Option Pool, but only some of the Promised Options, sometimes.

Unless you’ve seen these countless times, it is difficult to follow one defined term through the formulas of the other defined terms that help define it. Case and point, I can’t even find a simple way to explain it. Needless to say, it’s not so Simple.

Who Cares

I wanted to redline the SAFE. There were certain off-market provisions. There were others which I feared if left in could disproportionately harm the client. As I customarily do, I started with the big-ticket item. After a thoughtful back and forth with the SAFE’s author, I succeeded in communicating my concern. What happened next was revelatory. The SAFE’s author asked me to let my comments go. His reason: “it’s supposed to be simple.” Sincerely, I was asked to ignore material deficiencies in the document for the sake of keeping an anything-but-simple document, Simple. It occurred to me that, perhaps, one of the unspoken upsides to an entrepreneur’s use of a SAFE is an expectancy that it will be reviewed by a non-lawyer who will conclude that what they’re looking at is in fact simple, and should therefore not be negotiated. This is psychological warfare. How dare an investor question the simplicity of this labyrinth! 

In Actuality.

Attention investors: If someone offers you a SAFE, it doesn’t mean you should be embarrassed to consult a lawyer. There is no such rule. If you told me the “S” meant “Somewhat simpler,” I could buy it. But in dealing with securities law, complicated cap table concepts, and multi-tiered conversion mechanisms, there is no simplicity. So, I advise, pay attention to your investment documents, no matter how simple they’re alleged to be. After all, an entrepreneur who doesn’t want you to protect your interests is one not inclined to protect your money. The next time you receive an “AFE,” make them earn the “S.”