In a world of big banks and Wall Street fat cats, a good heist plot is great for getting attention. Sometimes sophisticated, sometimes chaotic, always complex – you have to stick around to see how the safe gets cracked.
At risk of getting flagged by the FBI, I’m going to lay out the easiest path to break into a SAFE. This method is not illegal, but can still make you some money if things go well.
I’m talking about Simple Agreements for Future Equity. This is a financial instrument that allows you to invest in early stage businesses planning for big growth.
The company gets to kick the can on the legal costs, valuation challenges, and structural requirements of stock offerings until they’ve grown a bit more. But they also get to invite (potentially) hundreds of investors to get in early on a company they believe in and want to take part in their targeted success.
It can be a great tool so let’s break it down so you get it, love it, and use it to invest* in exciting** high-growth*** businesses****.
Simple. Easy enough.
Agreement. Contract between you and the company raising capital.
for Future. Not right now, but if (…IF) certain “trigger” events happen.
Equity. ownership stake in the company.
If you invest using a SAFE, you have a financial interest in the company but do not immediately hold equity. If certain events occur – like a sale, acquisition, or IPO, your investment converts to equity or cash. Of course these “trigger” events are not guaranteed and you may not get a return if they do not happen.
I know what you’re thinking: “This sounds neat! So how much would I make?” I’ll get there, but you need to know two definitions that determine potential returns:
- Valuation Cap – What this is not: a cap on the value of your shares.
What this is: the maximum valuation that your investment would convert into equity (or shadow shares…I’ll define this one too). At a trigger event, you would receive shares at this price, even if the company’s valuation is higher.
- Discount – the percentage you get off of the share price at a trigger event. This means you would get cheaper shares compared to what the new investors paid.
Bonus definition: Shadow Shares – shares that mirror the type of security issued in the subsequent financing, only they don’t grant investors voting or information rights. Companies may choose to convert SAFE investments to shadow shares at a subsequent equity financing round.
SAFEs may use both a valuation cap and a discount. Whichever is more favorable for the investor at a trigger event will apply.
Now let’s crunch some numbers!
Let’s say MoneyIntheB, Inc. sets a valuation cap of $5 million and a discount of 20%.
You invest $1,000.
Scenario A: MoneyInTheB, Inc. gets acquired for $10 million in the future. Since your investment would convert at a valuation cap of $5 million, your $1,000 investment would be worth $2,000 in equity.
Scenario B: MoneyInTheB, Inc. raises capital in the future at a $6.5 million valuation, which is 30% over the $5 million valuation cap, making your investment worth $1,300 in equity.
Scenario C: MoneyInTheB, Inc. raises capital in the future at a $5.5 million valuation. In this case, the 20% discount is more favorable. Basically, you would get $1.00 worth of shares for $0.80. Meaning your investment would be worth $1,250 ($1,000/0.80).
Scenario D: MoneyInTheB, Inc. runs out of money in the bank and goes bankrupt. No triggering event occurs and your $1,000 investment is worth $0.
Well folks, we’ve arrived at our destination SAFE and sound. Read over it a couple times and look for a real life example on our portal that might make you want to give it a try! It’s really more simple than it sounds. This is merely an instrument that allows you to buy low at the very moment when it’s time to sell high.
*only what you can afford to lose
**completely subjective, and never the sole reason you should invest
****jk on this one. We do make sure these are actual businesses that take raising money seriously.