Better SAFE Than Sorry? A New Way to Finance Start-ups

Guest Post by David F. Broderick, Benjamin M. Hron, David J. Sorin, and Jared M. Sorin – McCarter & English, LLP

McCarter attorneys are providing this information to initiate debate on the pros and cons of SAFE transactions.

The game for fledgling companies and their investors is early-round, seed-stage financings, and there’s a new player in town. Already embraced by West Coast venture capitalists and start-ups, SAFEs – Simple Agreements for Future Equity– appear to be headed east and poised to move alongside, and possibly supplant, convertible note financings.

SAFEs allow investors to finance companies today with the promise of equity participation at some time in the future. Unlike convertible notes, SAFEs are standardized, one-document securities, not debt instruments.

Here’s why SAFEs are in favor on the West Coast – where innovation in seed-stage finance tends to be adopted first – and figure to gain traction swiftly in the East and nationwide:

  • Compared to convertible note financings, SAFEs are faster to generate with lower transaction costs.
  • They entail relatively little negotiation, usually nothing more than a discount rate and/or capped conversion price.
  • They more accurately reflect the realities of early-stage company valuations, and investment risks and rewards, to the benefit of the company and prospective investors.

It’s All About the Equity, Not the Coupon

Rational investors recognize that the underlying value of early-stage and seed-stage investment lies not in the 6-to-10-percent interest rate common in convertible note transactions, but in the equity stake acquired when such notes are converted. SAFEs embody this general notion, more accurately reflecting the substance and goals of the investment. SAFEs can include the discounts and capped conversion prices associated with convertible notes, but also can be consummated without such provisions. Like a convertible note, a SAFE, by its terms, outlines when it converts to equity, but unlike a convertible note, the conversion is triggered without a threshold amount of capital the company must raise.

Convertible note financings came swiftly into favor, are used with increased frequency, and are unlikely to disappear altogether. SAFEs have not yet been thoroughly dissected, vetted, reviewed and tweaked by companies, investors and their respective counsel. Yet there is enough appeal to them that they are attracting interest – and the attending scrutiny – here in the East. Our firm represents an early-stage company in New York that is utilizing SAFEs in a series of financial closings (albeit with West Coast investors), and represented the investor in a SAFE transaction involving Canadian and U.S. companies.

Next Steps for You (the Entrepreneur or the Investor)

The signals are clear: SAFEs are on their way – upward, onward and eastward, as seed-financing force Y Combinator is utilizing them and advocating for their adoption. The first signs of SAFE life are now appearing in the East. SAFEs meet many of the objectives, and seem to avoid many of the pitfalls, of convertible note financings.

Whether you are an early-stage or emerging-growth company, or an investor looking to finance the Next Big Thing, consult with sophisticated corporate and securities law counsel to see where SAFEs might fit in your capital-raising model or portfolio.


David F. Broderick, Partner, dbroderick@mccarter.com

Mr. Broderick practices in the areas of corporate and securities law, including mergers and acquisitions, venture capital and strategic investments, public and private securities offerings and joint ventures. He is particularly skilled in venture capital and private equity investment transactions.

Mr. Broderick is a co-head of the firm’s Small Business Investment Company (SBIC) practice. His involvement with the SBIC program dates back to 1993 when he successfully represented a client in obtaining one of the first participating securities licenses issued by the Small Business Administration. As a result of that experience, he has since represented numerous SBIC licensees in connection with their fund formation, SBIC licensing, fund raising, regulatory compliance and investment transactions.

Full Biography

Benjamin M. Hron, Special Counsel, bhron@mccarter.com

Ben Hron is a business law attorney whose practice focuses on advising private companies, most in the life sciences and information technology industries, on general corporate matters, angel and venture capital financing, mergers and acquisitions, securities law compliance and strategic collaborations. He also represents investors in connection with the financing of private companies. Ben has extensive experience working with entrepreneurs and emerging companies, often getting involved when a business is still in its infancy and helping guide the founders through the formative early stages of their company’s development. Ben also co-chairs the McCarter & English seminar series for entrepreneurs at the Cambridge Innovation Center.

Prior to joining McCarter, Ben co-founded VC Ready Law Group, a boutique law firm serving emerging technology companies. Ben’s experience running his own company helps him better understand and address the issues facing his clients. Ben worked at two other prominent Boston law firms before launching VC Ready.

Full Biography

David J. Sorin, Partner, dsorin@mccarter.com

Dave Sorin is the managing partner of McCarter’s East Brunswick office and the head of the Venture Capital and Early Stage and Emerging Companies practice. He focuses his practice primarily on privately- and publicly-owned startup,early stage, emerging growth, and middle market technology, tech-enabled and life science enterprises, as well as the investors, executives, and boards of directors who support and lead them. Dave has a long track record of successful representation of growth companies, having been repeatedly recognized by well-known periodicals for a unique combination of legal acumen and sound business judgment. He also brings to bear his broad range of knowledge and experience in counseling enterprises and investors in diverse emerging growth markets, technology industries (including software, information technology, e-commerce, and communications), and life sciences. Many of the companies he represents are well-known names throughout the Mid-Atlantic region.

One industry-leading publication has recognized Dave as one of New Jersey’s top 100 business people, categorizing him within an “elite group” of executives who “are the voices of their industries.” He was later identified by another industry publication as one of the region’s “top deal makers.” Chambers USA, an international guide to lawyers and law firms, called Dave the State’s top corporate lawyer. More recently, Lawyer Monthly Magazine identified Dave as one of the top 100 Lawyers in the world in the category of emerging growth company representation and he also was named to the 2014 NJ Super Lawyers list.

Full Biography

Jared M. Sorin, Associate jsorin@mccarter.com

Jared Sorin is an associate of the firm. He concentrates his practice on advising entrepreneurial clients in a broad range of technology-driven industries in the areas of general corporate, transactional and securities law matters. Jared drafts and negotiates documents for, and counsels with respect to, choice of business entity, public and private equity financing transactions, securities law compliance, mergers, acquisitions and divestitures, debt financings for private and public companies, business formation, consulting agreements and due diligence on transactional matters.

Jared began his legal career as a law clerk and summer associate at Sorin Rand. He attended Fordham University School of Law where he was a member of the Fordham Journal of Corporate and Financial Law, and of the Blog Team. Jared earned his undergraduate degree in Government from Hamilton College, where he graduated Phi Beta Kappa.

Full Biography

McCarter & English, LLP

McCarter & English, LLP is a full-service law firm with over 400 lawyers with offices in Boston, Hartford, Stamford, New York City, Newark, Philadelphia, Washington DC, and Wilmington. In continuous business for more than 170 years, it is among the oldest and largest law firms in America.

McCarter offers a broad spectrum of interdisciplinary legal services to our clients—Fortune 100, 500 and middle market companies—which include some of the nation’s leading financial services, high-tech, pharmaceutical and retail entities. The firm handles national, regional and local business transactions and litigation, and counsels governments, non-profits, emerging companies, institutions and individuals, representing clients across all major industries, stages of growth, and practice areas. McCarter possesses the depth of knowledge and range of skills necessary to serve clients in a variety of disciplines and practices, both nationally and internationally—putting in the effort to learn its clients’ business to provide them with efficient, cross-disciplinary legal services around the globe.

Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from McCarter & English, LLP. This work reflects the law at the time of writing in 2015.

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