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.

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.