Safes

A prior-post described the use of convertible notes as a means by which companies raise capital prior to having a valuation upon which to calculate a per share price.  An alternative to a convertible note is a Safe, which is an acronym for “Simple Agreement for Future Equity”. Like a convertible note, per a Safe an investor pays an agreed to amount to the issuing company, and on the occurrence of the company’s next financing round the Safe converts into the stock sold in the financing.   Usually interest will accrue on the Safe, and when the Safe converts the holder of the Safe will typically receive a discount on the price being paid for the stock being issued. For instance, assume an investor pays $100,000 for a Safe, it accrues interest of 4% per year and carries a 20% discount. If in one year the Safe issuer sells $1,000,000 of preferred stock at $10.00 per share, the Safe will convert and the holder will receive $104,000 of preferred stock at a price of $8.00 per share. 

One important thing to note is that Safes were originally written for corporations, and not for use by limited liability companies.  Thus, the terms of the Safe (such as conversion into preferred stock) will likely not apply to LLCs. However this is not to say they cannot be used by LLCs.  Rather, the typical Safe will have to be revised such that its terms apply to limited liability companies (for instance, that it converts into units of interests in the LLC).  

If you wish to learn more about Safes please contact Stephen Goldstein at Sgoldstein@sgoldlaw.com, or at (212) 586-5555.