Two Client Case Studies: How to Raise Capital Using the New SAFE for LLCs

case studies  labelI created the Simple Agreement for Future Equity (SAFE) for LLCs for my LLC clients that needed a simple financing instrument to raise capital swiftly without much legal expense, while retaining pass-through tax treatment for their businesses. The SAFE for LLCs is an alternative to the Y Combinator SAFE, which is designed specifically for C-Corporations.

With the passage of the Tax Cuts and Jobs Act of 2017, the LLC remains an excellent structure for many business entities, the individual owners of which are now eligible to deduct 20% of their LLC-derived “qualified business income” on their US federal tax returns (subject to certain exceptions and limitations).

Since the LLC is largely a creature of agreement, its flexibility allows the SAFE for LLCs to be tailored to a wide variety of financing transactions. Here are two case studies showing the way my clients have used the SAFE for LLCs:

(A) Search Fund Financing:

  • Background: A former business executive at a multinational corporation and his business partners joined to form a search fund to acquire and roll-up various retail business assets under an LLC holding company. The assets were to be consolidated, re-vamped and re-branded under a single name, thereby adding substantial value.
  • Challenge: The client needed to quickly raise $500,000 to finance the asset search, due diligence and initial asset purchases. From their contacts in the industry, the client team had access to capital from private accredited investors, but needed a contractual mechanism to receive and deploy the funds.
  • Solution: I created a variant of the SAFE for LLCs called a “Seed Financing Investment Agreement (SFIA)” that allowed the client to raise the capital and spend it over 6-month search period (extendable for another 6 months) to identify and place assets for acquisition under contract. Upon the closing of a “next equity financing” (i.e., financing of at least $3,000,000) or a “liquidity event” (i.e., sale of equity or assets of the LLC), each SFIA automatically converts to the SFIA investor’s pro rata portion (based on his/her investment amount) of 25% of the the equity units owned by or issued to the LLC founders in the LLC as of the closing. This structure, in which the founders actually shared a portion of their equity with the investors, coupled with the founders’ experience and acumen, clearly aligned the investors’ and founders’ interests, and the target $500,000 was raised in short order. After the issuance of all SFIAs, the LLC succesfully closed the “next equity financing” for the acquisition and roll-up of the target assets and the SFIAs converted to founder-equivalent equity.

(B) The Film Financing:

  • Background: A film production company needed to raise capital for a new documentary film involving a time sensitive and controversial matter. The funds would be used to identify a screenwriter, develop a script, and engage in related film development activities.
  • Challenge: The client, a special purpose LLC wholly-owned by the film production company, wished to raise approximately $300,000 to finance the initial development of the project.
  • Solution: I created a variant of the SAFE for LLCs called a “Film Development Investment Agreement (FDIA)” that allowed the client to raise sufficient capital to finance the project within 30-60 days. The FDIA automatically converts to a special class of equity units upon the closing by the LLC of a “next equity financing” for the consummation of the project. The equity units to be issued to FDIA investors are the same as the equity units to be issued to investors in the “next equity financing”, except that they offer a 3% enhancement in preferred return relative to the preferred return payable on the standard equity units issued in the next financing. If a “liquidity event” occurs before the “next equity financing”, each FDIA investor had the priority right (over the LLC owners) to receive his/her original investment amount plus 30% of such amount, reduced on a pro rata basis among investors based on the LLCs available cash. The LLC is presently using the FDIA funds to develop the film.

These two case studies are merely examples of the many ways in which LLCs can swiftly and efficiently raise capital using the SAFE for LLCs. If your business is an LLC or a limited partnership and needs to raise seed capital, the SAFE for LLCs may be a viable option for you. Please contact me for details.

Introducing the Simple Agreement for Future Equity (SAFE) for LLCs

Updated March 31, 2021:

There are now two versions of the model form Safe for LLCs:

  1. The new post-money Safe with valuation cap (short form), which may be viewed here and purchased here; and
  2. The original pre-money long-form Safe with optional discount and valuation cap, which may be viewed here and purchased here.


My Simple Agreement for Future Equity (SAFE) for LLCs is the first SAFE specifically designed for limited liability companies classified under U.S. federal tax law as partnerships or disregarded entities.


Free, Publicly-Available Startup Company Forms and Document Generators

The angel investor network Blue Water Angels has compiled a nice summary of free, publicly-available, startup forms and document generators, including direct links to those forms and generators, all available here.

Remember: even if you start with a good form, always engage your favorite corporate lawyer to review your documents before signing off.

The devil is in the details.

How to Maximize Your Minority Rights in Small-Scale Private Equity Investments

Even if you consider yourself a small-scale investor in private companies relative to today’s private equity giants, you should seek certain basic minority rights to protect your investment and enhance your exit opportunities.  In fact, most minority protections that a small-scale investor should seek are exactly the same as those that any larger PE fund would require.

Among my clients, these small-scale private equity investments generally range from $100,000-$3,000,000 for purchases of 10%-30% of a company’s outstanding equity.  They may be investments in corporations or limited liability companies (LLCs).

Here is an overview of rights you should consider:

  1. Preferred Equity.  The preferred stock (corporation) or preferred membership interests (LLC) may have any or all of three elements to help compensate you for placing your capital at risk:
    • A preferred right to dividends or distributions, which should be coupled with a tax distribution clause in an LLC;
    • A liquidation preference, giving you the right to be paid prior to other investors upon a dissolution or sale of the company or its assets; and
    • a right to convert into common equity if the common’s value would be higher than the value of the preferred in a change in control transaction.
  2. Preemptive Rights; Anti-Dilution Protection. A preemptive right is the right to acquire your pro rata share of any new securities issued after the date of your investment, which is self-help protection against dilution.  Preemptive rights may also be coupled with anti-dilution protection, allowing you to receive additional equity if securities are issued below the per unit price you paid for your equity.
  3. Board Appointment. The right to appoint a member of the board of directors (corporation) or board of managers (LLC) gives you a seat at the table at board meetings and the right to vote on board matters.  If board appointment rights cannot be negotiated, you could seek to appoint a non-voting board observer to attend meetings.  Your director/manager should receive at least the same indemnification benefits as other directors.
  4. Veto on Material Transactions.  You should seek a veto over company actions that could materially and adversely affect your investment, such as:
    • Bankruptcy or other liquidation or winding-up;
    • Acquisitions of equity or debt securities or assets;
    • Mergers, consolidations, conversions, or reorganizations of the company;
    • Sales of substantially all of the company’s assets;
    • Formation of subsidiaries;
    • Amendments to governing documents;
    • Transactions with affiliates;
    • Incurrence of debt or expenditures above a certain limit;
    • Termination of key employees; and
    • Changes in board size or composition.
  5. Financial Reports. Quarterly and annual financial reporting may be required, as well as audited financials in certain cases. If the investment is in an LLC, annual tax reports should also be provided to enable you to timely file Form 1065 K-1.
  6. Warrant/Option Rights. The warrant or option is a useful tool for mitigating risk while retaining upside opportunity.  Depending on the terms, a warrant or option can allow you to increase your investment incrementally during an agreed exercise period at the same price and the same valuation associated with the original investment.  This reduces your downside risk if the company fails to perform as anticipated and helps preserve your upside.
  7. Right of First Offer (ROFO).  A ROFO requires an equity holder who receives a third party offer for the purchase of his units to first offer to the other equity holders the right to purchase their pro rata portion of the seller’s units on the same terms as those offered by the third party.  The ROFO can enable you to increase your equity ownership by purchasing the equity of others, which is particularly beneficial if the company’s prospects are favorable and you are able to capitalize on distressed sales by other equity holders.
  8. Exit Rights.  There are several different types of valuable exit rights, a few of which are described below:
    • Tag-Along.  The corollary to the right of first offer is the tag-along right, which gives you the right to “tag-along” on a unit sale by a selling equity holder to a third party on the same terms as those given to the selling equity holder.
    • Drag-Along.  The drag-along right allows a group of equity holders (usually a supermajority) to require all equity holders to participate in a sale of company equity or assets.  If you, as the minority investor, do not wish to be made subject to the tyranny of the supermajority in a drag-along provision, you could negotiate for an appraisal mechanism requiring determination of the fair market value of the equity proposed to be transferred as a condition to the supermajority’s exercise of its drag-along rights. If the appraisal determines that the actual fair market value is greater than the proposed drag-along sale value, you would have the right to retain your equity.
    • Right to Cause a Liquidity Event. You may wish to negotiate the right to obligate the board and shareholders to pursue a sale of company equity or assets the company fails to achieve certain pre-determined milestones.

Introducing the Simple Safe Spreadsheet (for pre- and/or post-money Safes)

There are two versions of the Simple Safe Spreadsheet:

  1. New (March 2021)!  To view and purchase the new post-money Simple Safe Spreadsheet, please click here. This spreadsheet is for use with Y Combinator’s post-money Safe, Valuation Cap (No Discount).
  2. To purchase a downloadable Excel version of the Simple Safe Spreadsheet for pre-money Safes, click here.

Thank you for supporting this project and please stay tuned for future startup friendly resources.


Y Combinator’s Simple agreement for future equity (Safe) was created as an alternative to convertible debt and seed equity financing for startup companies. The Safe is a manifestation of Paul Graham’s concept of high resolution fundraising, which contends that startup financing is more efficient if companies can close different investments (sometimes at varying price and other terms) on a rolling basis with different investors. The Safe embodies this concept, while seeking to provide reasonable contractual protections for investors.

In the words of Carolynn Levy, the YC partner and former Wilson Sonsini lawyer who created the Safe, “[t]he Safe is just a convertible note with the ‘event of default,’ interest, and maturity date provisions stripped out. It is a convertible security with a creative acronym.”

Since the Safe’s release in December 2013, the startup community has engaged in a lively debate over the instrument’s benefits and drawbacks, including comments by lawyers herehere and here; venture capitalists herehere and here; and a Wall Street Journal article here. The Cooley law firm has created a Safe financing documents generator and Practical Law has developed its own form of Safe.

The main argument against the Safe from investors is that it lacks the maturity date, interest rate and certain other investor protections associated with convertible notes or seed equity. While this is true as to the standard form Safe, for some issuers and investors, the benefits of the Safe outweigh the marginally greater investor protections and complexities of convertible notes and seed equity. These Safe benefits include the following:

  • The Safe is a simple, short document of only 5 pages in length. Compare this to the often more complex convertible note (plus note purchase agreement) or seed equity financing, the latter which generally requires drafting and negotiation of an amended certificate of incorporation, investors’ rights agreement, stock purchase agreement, etc.
  • Similar to a convertible note, the Safe can be tailored to include a valuation cap, a discount or both (or neither), allowing it to be easily customized for the investor. Customizations may also include additional protections for major investors, such as rights of first offer (ROFO)observer rightsinformation rights and other rights.
  • The Safe is not debt, so a standard Safe has no interest payable and no maturity date, eliminating the need re-negotiate a convertible note at maturity.
  • The preferred stock issued to a Safe investor upon conversion has a liquidation preference equal to the amount the investor paid for the Safe, so the company is not unjustly burdened (and the investor is not unjustly enriched) with liquidation overhang.
  • The form Safe was first released in December 2013, allowing the market adequate time to familiarize itself with the Safe, expediting market acceptance.

The above benefits of the Safe mean that the closing of a Safe investment can sometimes be accomplished very quickly. This translates into faster access to capital markets for startups and lower legal fees.

In an effort to make Safe fundraising even more efficient for startups and investors, I have created a Simple Safe Spreadsheet, which hypothesizes various economic results for companies and investors using the Safe. The results include the preferred shares issuable to an investor upon the occurrence of an “Equity Financing” (e.g., Series A) at a given pre-money valuation and offering amount and the cash payable to an investor upon the occurrence of a “Liquidity Event” (e.g., sale of the company) for a given purchase price. The capitalized terms in the spreadsheet are the same as the defined capitalized terms in the Safe to facilitate cross-referencing and analysis. The spreadsheet’s results should be identical to the results given in Safe Primer examples if the Primer’s assumptions are used in the spreadsheet (with some variation due to rounding).