If you’ve raised a pre-seed or seed round in the past few years, you likely did it through a SAFE (Simple Agreement for Future Equity). And if the early investor pushed back on your valuation cap, or you didn’t want to set one yet, you may also have agreed to a “Most Favored Nation” clause
Before 2013, issuers were prohibited from using any means of general solicitation or advertising when raising capital in the private markets. The prohibition was perceived by many to be the single biggest impediment to raising capital privately, particularly since it foreclosed the use of perhaps the greatest capital raising tool ever created: the Internet.
That all changed in 2013 when the Securities and Exchange Commission created new Rule 506(c) under the JOBS Act of 2012, which allowed companies for the first time ever to seek investors through general solicitation and advertising without registering with the SEC, so long as they sold only to accredited investors and used reasonable methods to verify accredited investor status.
So what are reasonable methods of verification? It clearly involves something more than what would meet the “reasonable belief” standard for determining accredited investor status for purposes of the 35 non-accredited investor cap for Rule 506(b) offerings, which as a practical matter means self-attestation through an investor questionnaire. That would not fly under Rule 506(c)’s reasonable verification method standard.
Continue Reading (Minimum Investment) Size Matters, When it Comes to Rule 506(c) Verification
In the world of early stage investing, there exists a range of structures from the most founder friendly to the most investor friendly.
The most investor-friendly structure involves some type of a priced round in which the investor receives shares of a class of preferred stock with a negotiated set of enhanced economic, management and exit rights. These rights and other terms are memorialized in a group of governance documents and agreements among the company, the investors and the founders.
On the other hand, the most founder-friendly investment structure is the simple agreement for future equity, or SAFE, which is similar to a convertible note but notably lacks an interest component and a maturity date. Next along the range of investor friendliness is the convertible note, which contains several investor protections, including interest, maturity, some reps and warranties and (sometimes) security. In the real world, however, more sophisticated investors routinely augment their protection under both SAFEs and convertible notes by negotiating side letters that provide them with more enhanced rights.
Documentation for priced rounds and SAFEs have benefited from standardization. The National Venture Capital Association website open sources a set of standard Series A documents which are a convenient starting point for initial VC rounds. Ted Wang of Fenwick & West developed a set of standard Series Seed documents in 2010 for use in lower dollar amount priced rounds. Gust Launch, a SaaS platform for founding, operating and investing in startups open sources a slightly more elaborate set of Series Seed documents. And Y Combinator, which created the SAFE, open sources its several varieties of the SAFE on its website. Only convertible notes have lacked standardization and the efficiencies that come with it.
Continue Reading Planting Seeds: New Standard Convertible Note Could Disrupt Angel InvestingThe impact of the Coronavirus and COVID-19 on venture capital investment will likely be 
similar to what we saw in the aftermath of the 2008 recession and the 2001 dot-com meltdown. VC investors will redirect their attention away from sourcing new deals and toward managing their existing portfolios, trying to determine which should survive and