A Crowd SAFE is an investment contract between investors and companies looking to raise capital. Individuals make investments for the chance to earn a return—in the form of equity in the company or a cash payout—if the company is acquired, goes public, or sells all of its assets.
The Crowd SAFE was
created by Republic
and is an adapted version of the
a financial instrument created by Y Combinator and widely used by angels & VCs investing in startups. It’s designed specifically to work for investment campaigns accepting hundreds or even thousands of investors, and it's now used by several industry players in various forms.
Investors using the Crowd SAFE get a financial stake in the company, but are not immediately holders of equity. Investments are converted to equity if certain “trigger events” occur, such as the company’s acquisition or IPO.
Risk note: Trigger events are not guaranteed. Investors should see them only as possibilities.
Your return depends on your investment amount, the company’s exit valuation (how much the company is worth if and when a trigger event happens), and the terms of the Crowd SAFE. Investors invest pre-money meaning that their stake is affected by future financings and events only.
Risk note: If a trigger event does not happen, you may never get a return on your investment.
Each company can customize its Crowd SAFE. Most companies include a valuation cap and a discount. If the Crowd SAFE includes both a valuation cap and a discount, the provision more favorable to the investor applies if there is ever a trigger event.
The valuation cap specifies the maximum valuation at which the investment converts into equity or shadow shares. This means that investors, when a trigger event occurs, receive equity shares at the valuation cap price—even if the valuation at which the company sells is higher. The higher the valuation of the company at the time of sale, the greater the investor’s return. Investors can also request their cash back if they believe this represents a better return on investment.
If a trigger event occurs, the discount provision gives investors equity shares at a reduced price relative to what others pay at IPO or acquisition. If the Crowd SAFE is converted during an equity financing, the discount will allow investors to receive shadow shares at a discounted price compared to what new investors paid.
Investors can earn a return if a trigger event occurs at a certain price threshold. Although trigger events sometimes happen earlier, many don’t occur for 4-6 years after the initial investment, and some may take even longer.
Risk note: Startup investing is risky, so there’s no guarantee of a return on this kind of investment.
In general, you can only sell a Crowd SAFE after one year from the purchase date and only if you find a buyer, which might not be easy to do.
Republic plans to work towards providing additional secondary market liquidity of Crowd SAFEs and other securities in the future.
In the event of future equity financing rounds, the company may choose to either “roll-over” Crowd SAFE holders and continue the terms of the Crowd SAFE, or convert the investment into shadow shares. If converted into shadow shares, the Crowd SAFE will secure the financial terms of that financing round to ensure Crowd SAFE investors receive the same benefit if there is an eventual exit event.
Shadow shares are shares that mirror the type of security issued in the subsequent financing, only they don’t grant investors voting or information rights. Companies may choose to convert Crowd SAFE investments to shadow shares at a subsequent equity financing round.
Risk note: if no exit occurs, you may never get a return on your investment. If no subsequent equity financing or trigger event occurs, the Crowd SAFE will not convert and will produce no return for the investor, which may lead to a loss of invested principal.
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