Yearly Archives: 2016

On May 16, 2016, the much-anticipated era of retail crowdfunding officially began in the United States. While it is far too early to pass judgment on the long-term prospects of the crowdfunding project more generally, it is possible at this juncture to assess how certain aspects of crowdfunding are developing. With respect to the menu of financing instruments being offered to prospective investors, early market participants are potentially sabotaging the crowdfunding experiment by making widespread use of a relatively new startup-financing instrument—the simple agreement for future equity (SAFE)—that may frustrate the ability of investors to share in the upside of successful crowdfunding companies.

The SAFE was developed by Y Combinator, the well-known startup accelerator based in Silicon Valley, as a means of investing in startups that expected to raise institutional venture capital at a later date. Although the SAFE resembles a classic seed-stage convertible note in most respects, it lacks the convertible note’s maturity date and does not accrue interest while it remains outstanding. It does not pay dividends, and the SAFE holder has no right to vote on matters submitted to shareholders. The SAFE is, in essence, a contractual derivative instrument that amounts to a deferred equity investment. It will prove valuable to the holder if, and only if, the company that issues it raises a subsequent round of financing or is sold.

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