By Lori Schock, Director of the Securities and Exchange Commission’s Office of Investor Education and Advocacy
Investing in a startup through crowdfunding may seem exciting, but when investing in the early stages of a new venture you need to educate yourself about the risks. Our investor bulletin about crowdfunding is a must read for anyone interested in learning more about the space including the risks involved.
When learning about crowdfunding, you should understand a new type of security called a SAFE—simple agreement for future equity—that is being offered as part of some crowdfunding offerings. A SAFE is an agreement between you—the investor—and the company in which the company promises to give you a future equity stake based on the amount you invested. It also involves some kind of a triggering event that must take place in order for you to get your future equity stake.
The most important thing to know about SAFEs is that they are not equity. They are very different from the common stock that you typically buy and sell when investing in a publicly listed company. Common stock gives you an immediate equity stake while a SAFE promises a future stake if it gets triggered.
You should understand what triggers the conversion of the SAFE—maybe it’s being acquired by or merged with another company. Or, it may involve the company’s initial public offering or another round of financing. But hold on, you should be aware that a SAFE may never be triggered and may never convert into equity. This means that you may never get a return on your investment or even your original investment back, leaving you with nothing.
There are many moving parts of a SAFE. Be sure to understand its conversion, repurchase, dissolution and any voting terms. As you can see, despite its name, a SAFE may not be simple or safe, and they can all be different. So, it’s important to know the terms being offered in advance.
SAFEs were first developed in Silicon Valley as a way for venture capitalists to invest quickly in a hot startup without burdening it with the more labored negotiations an equity offering may entail. And while this may or may not be the case with the crowdfunding investment opportunity you are exploring, it’s important to know the facts about this type of security before you invest. Be safe. And, go to Investor.gov for additional investor tips.
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.