A SAFE (Simple Agreement for Future Equity) is a financing contract used by companies to raise capital in their seed financing rounds. A SAFE aims for long term stabilization by eliminating those features that make convertible debt risky.
The KISS (Keep It Simple Security) docs are short and sweet funding documents released by 500 Startups after feedback from many early-stage investors. They are designed to be flexible, simple, and balanced from both the standpoint of the company and investor.
Entrepreneurs have options when it comes to fundraising for their new business. Attorneys providing legal fundraising services can advise you about the various benefits and liabilities of these financing options, helping you make the most informed choice for your business. When raising funds for your company, an entrepreneur must decide between taking on debt, issuing equity, or pursuing alternative financing methods like crowdfunding.
Our attorneys have experience with all of the legal fundraising options that business owners need to understand so they can make an informed and reasonable manner. For companies who prefer to raise capital through equity, an experienced fundraising law attorney can help set up an equity financing raise. An attorney can also ensure that corporation is set up to raise money by selling shares of stock in the company. Regardless of the method of fundraising you choose, a skilled attorney can be very helpful in providing you with the fundraising services you need to make your capital raise a success.
Do I have to take out a loan to fund my business?
Not necessarily. Businesses commonly take on debt to launch or grow. However, corporate debt options go far beyond traditional business loans. Potential fundraising services include a corporation issuing a convertible note, which raises seed funding as debt that converts into equity once the business is established, raising money through investors in a friends and family, seed, or series rounds, or receiving money through crowdfunding.
What’s the difference between a convertible note and a loan?
Two key characteristics distinguish a convertible debt note from an ordinary loan: (1) the discount, and (2) valuation cap. The discount is a feature that rewards early investors for taking larger risks than later investors. It does this by offering them the right to obtain shares at a cheaper price than that paid by Series A investors, once that round closes. The conversion cap similarly rewards early investors for their disproportionate risk, but in a different way than the discount. The cap sets the maximum value of a company when Series A closes, again giving an advantage to earlier investors.
I formed my business as an LLC. What kind of financing options do I have?
Unlike a C-Corp, which can issue equity shares through a public offering, an LLC must raise equity financing by selling shares of their business directly to new partners or owners. An LLC operating agreement should spell out the ways your limited liability can sell ownership equity, and an experienced fundraising law attorney can help you with all aspects of your equity sale.
Do I need an attorney if I use crowdfunding to raise money for my business?
It depends. Crowdfunding is new phenomenon that has taken the fundraising world by storm. It allows investors to go directly to their friends, neighbors, and the entire online community for financing. With popular websites like Kickstarter and Indegogo giving millions of people across the world the opportunity to invest in new products and services, crowdfunding has helped businesses launch many successful new enterprises. However, crowdfunding must be carried out in a particular way to avoid critical pitfalls in financing law. An attorney can help you set up your fundraising program in a manner that ensures you are compliant with all crowdfunding laws and maximize your likelihood of ultimate success.
Should I go with a KISS or a SAFE document?
It depends on your situation. They’re both really helpful for businesses and investors looking for a simple agreement with clear terms. Generally, SAFE agreements are thought of as most founder friendly as they lack even the most basic forms of protection associated with convertible notes, namely an interest rate or a maturity date. On the other hand, terms within KISS agreements favor investors with a 5% interest rate, 18 month maturity date, information rights, and an automatic conversion of preferred stock if the company reaches $1 million in funding at the next round.
I want to form a 501(c)(3) organization and fundraise through grants and charitable giving. Should I consult with an attorney?
Yes, absolutely. Whether you’re operating a community daycare service or providing a product or service for an impoverished or underserved community, there are several complex laws and regulations that affect launching a nonprofit organization. Before you start your nonprofit, consult with an attorney that can advise you about what you need to consider before launching your new endeavor.