The Crowd Safe
A legal product that enables startups to raise money via investment crowdfunding without cap table concerns.
Raising money?
We'd love to hear from you.
Background
Existing security instruments are poorly-suited for Title III crowdfunding financings. Startups can be left with hundreds of unaccredited investors on their cap table, each with a relatively small capital commitment.
This is problematic for several reasons:
- Company operation becomes more complex with more shareholders, who are entitled to certain information and voting rights.
- Any company with 500 unaccredited shareholders and $25 million in assets must go public under U.S. Securities law.
- A “messy” cap table can deter future institutional investment.
The Crowd Safe
A Crowd Safe gives the company flexibility over if and when its crowdfunding investors become its shareholders or owners of record. The Crowd Safe is a derivative of the Y Combinator Safe (short for “simple agreement for future equity”).
Similar to the standard YC Safe, a Crowd Safe simplifies seed financing by eliminating the maturity dates and interest associated with convertible notes. The main differentiating features of a Crowd Safe include:
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Extendability
Companies can choose to extend the Crowd Safe and avoid converting upon their first equity financing.
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Fixed conversion price
A fixed conversion price ensures that investors have the same economic outcome regardless of whether the Crowd Safe is converted.
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Limited investor rights
Upon a conversion, investors receive special shadow shares with limited voting and information rights.
These features – enabling discretionary conversion rollovers – can also be added to the standard convertible note and 500’s KISS instruments, which we name Crowd Note and Crowd KISS, respectively.
As a flexible and renewable security, the Crowd Safe helps startups fundraising under Reg CF avoid “messy cap table” concerns, save legal fees and reduce the time spent structuring the terms of their financing.
Because a Crowd Safe has no expiration or maturity date, founders need not waste time or money dealing with extending maturity dates, revising interest rates or the like. The Crowd Safe can be used by companies from pre-seed to late stage, before, after, or concurrent with an equity issuance.
Use & Customize
Crowd Safe terms can be modified to meet founders' specific needs. For example, a Crowd Safe can grant investors (instead of the company) the choice to convert after an equity financing – and promptly be liquidated by the company – or extend the Crowd Safe to the next financing.
Similarly, a Crowd Safe may have pricing terms with valuation cap, pricing discount or both. Companies should review and customize these templates with the help of experienced counsel. Republic does not assume any responsibility for any consequence of using these documents.
Feedback
We appreciate the helpful feedback of friends and attorneys, and we expect we will iterate further on the Crowd Safe. Please send your comments to issuers@republic.co.
Crowd Safe and CrowdSafe are trademarks of Republic and are subjects of a registration application pending with the United States Patent and Trademark Office.
