The NextSeed SAFE is a version of the traditional SAFE that has been customized for crowdfunding. It aims to supplement the flexibility of the SAFE with specific rules that make cap table management easier for Issuers and protect investors with respect to potential dividend payments.
How does a SAFE work?
SAFEs are agreements that entitle the holders to discounted equity in a business in a subsequent priced equity round or IPO.
SAFEs are typically used by early-stage companies to raise capital where valuation is still challenging to determine. Businesses use SAFEs to avoid setting a price for a round while still giving investors the benefit of converting to equity at a discount in the future (usually with a priced equity round).
SAFEs often have some combination of a valuation cap and a discount.
The valuation cap is set at a certain dollar value (ex. $3 million). This is not the valuation of the business. Instead, it’s a cap on the future valuation that gives investors some potential upside. When a future valuation event occurs (i.e. a funding round or a sale of the business), the SAFE can convert to equity. If the future valuation round is higher than the valuation cap, then the investment converts to equity as if the investor invested at the valuation cap. If the future valuation is lower than the valuation cap, the investment might simply convert at the new price.
SAFEs may also have a discount in the terms (ex. 20%). This gets applied when the valuation is set either below the valuation cap or in the absence of a valuation cap in the terms. Then, the investment will convert at a discount below the new valuation.
Who is this option best for?
SAFEs can be a good option for businesses that have a lot of upside potential but are unable to set a valuation for the company at an early stage.
SAFEs are often compared to convertible notes. Without the accruing interest and maturity date of a convertible note, SAFEs are less of a burden on the business.
What are the unique attributes of a NextSeed SAFE?
- Clean Cap Table
One of the key concerns that businesses have with investment crowdfunding is that investors in later rounds (especially Venture Capital firms) don’t want to deal with a cap table showing potentially hundreds of investors.
The NextSeed SAFE is structured so that conversion to equity only occurs upon an exit or when the Issuer decides to trigger the conversion.
- Investors Lock in Conversion Price
Upon the first priced round of equity financing following issuance of the NextSeed SAFE, investors in a NextSeed SAFE are locked into a conversion price.
The valuation cap or the discount, as applicable, is used to set the valuation at which investors will convert. However, the Issuer has the option to decide whether to trigger an actual conversion at that time. If an Issuer later raises additional rounds of financing, the conversion price for investors in the NextSeed SAFE will remain unchanged – set at the initial round of financing.
- Voting Rights
Upon conversion, NextSeed SAFE holders will not have voting rights or management rights, except for those required by applicable law. Any voting rights held by NextSeed investors following a conversion will be subject to an Irrevocable Proxy Agreement in favor of NextSeed.
- Dividend Payments
To ensure that NextSeed SAFE holders are not negatively affected by any postponement of conversion by any Issuer, investors are entitled to a pro rata distribution (on an as-converted basis) of any dividends or similar distributions paid out by the business to its equity holders. In this way, even if a business delays conversion of the NextSeed SAFEs multiple times, investors will receive all payments to which they would otherwise be entitled.
The exact terms of a NextSeed SAFE offering will vary with each campaign, so make sure to review the campaign documents. All the information is located on or accessible from the applicable offering page.