When you're managing your startup, one of the first orders of business is to raise funding for your ventures. This will involve attracting and negotiating with investors. These investors will trade capital for equity in your business.
Managing these relationships (and funds) can result in a lot of pressure and liability for your young business. It's a good idea to get the expectations of the investor-startup agreement down in writing. Currently, there are two main ways to do so: Subscription Agreements, and SAFEs (or Simple Agreements for Future Equity).
Which is best for your business? We'll go over the pros and cons of each approach below.
What is a SAFE?
One of the methods for managing investments while your company is in its earlier stages involves a Simple Agreement for Future Equity. These types of agreements are popular because they don't require a startup to value their business up front. Accurately evaluating your startup can be difficult. Often, you don't have much data to work with. A SAFE presents an attractive workaround.
A SAFE is a form of convertible security. If investors contribute to your startup through a SAFE, they're hoping their high-risk investment one day converts into high-reward shares of your company.
There are benefits for you, too. A SAFE doesn't carry debt. If your company goes bankrupt and fails, you'll return any remaining money you have to your investors. You won't be liable for any lost funds. There is also little negotiation time, simpler forms to sign, and, ultimately, very company-friendly in terms of risk.
What is a Subscription Agreement?
Another way to raise funds for your new business involves a subscription agreement. This type of agreement exists between an investor and a startup, and it details the number of shares that an investor purchases for their investment.
It's a one-time investment. Even though the name sounds like it involves a recurring payment, these types of agreements simply mean that investors have a stake in your company.
Sometimes, these contracts include a specified rate of return. They may also include a statement documenting an investor's suitability.
Subscription agreements are more fixed than SAFEs. Very simply, the startup company offers to sell a set number of shares for a specific price. If an investor agrees to those terms, that investor is officially a shareholder of the startup. This can be less nebulous than a SAFE. However, you do need to value your business up front to set a strategic yet fair price per share.
These types of agreements are popular when a startup wishes to keep its investors private - and silent. There's much less risk involved for investors, which many may find attractive.
Protecting Your Interests as a Startup Starts Now
While your company is in its infancy, it's vital to ensure that you protect your assets. One superior way to do so is to work with an experienced attorney to manage all investors throughout your initial fundraising campaigns.