Can a startup that was founded as an LLC raise a series A using a SAFE (Simple Agreement For Equity)?

As you’ll quickly learn, not all processes are appropriate for every type of business. Such is the case here. As other answers have indicated SAFE agreements are not intended to be used in LLCs. The reason it doesn’t work is that LLCs have a different legal structure and requirements than you’ll see in a traditional C-corporation. If you are interested in pursuing a SAFE agreement, it may be in your best interest to simply start out a s a C-corp and save yourself the trouble of converting later on. You can certainly start out as an LLC is you prefer, but the process to convert to a C-corp is not free or simple.

It sounds like the better question to answer is if your business would be better situated as a C-corporation. Here are a few things to consider that may help you make the distinction.

Points to consider about a C-Corporation:

  • May require VC for financing
  • Owners have access to flexible profit-sharing
  • Company earnings remain within the business so it can grow
  • Flexibility to spread the business earnings between the corporation and shareholders for tax-planning purposes
  • Have flexibility with establishing employee salaries
  • Easier selling process
  • Has potential to offer stock options to employees
  • Optimal choice if you plan to own real estate
  • Potentially lower risk for IRS audit

While a SAFE agreement is not appropriate for an LLC, your business may be better suited as a C-corp anyway. You should consult a startup attorney to learn which strategy is right for you.

LawTrades can help. We can connect you with a seasoned business attorney that can help you identify which entity is right for you business. We have already helped over 1000 entrepreneurs with their endeavors so you can rest-assured we will provide you with the same quality services. Contact us for your free, no obligation consultation.