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EquityBender is a funding portal registered with the Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA). We provide an online portal for investors to identify, evaluate, and invest in new ventures. EquityBender leverages a user-friendly electronic platform to facilitate the connection process between investors and start-ups. EquityBender believes in a transparent, collaborative, and value-add approach to support entrepreneurs and the investing public. Be part of the next generation of online equity investing. Today.
If you are seeking to invest in U.S. based early-stage technology companies, EquityBender may be the Crowdfunding Portal for you. Each year thousands of early-stage companies seek investments to grow their business. Until recently, only accredited investors with access to deal flow could participate in these investment opportunities. Today, EquityBender's online equity platform makes it possible for all investors to review issuer materials and invest using a transparent, secure, and cost effective portal.
Updated: Crowdfunding and the JOBS Act: What Investors Should Know
FINRA is issuing an update to this Alert to advise investors about the inflation-adjusted increase in investment limits for securities-based crowdfunding. The Jumpstart Our Business Startups Act (JOBS Act) established crowdfunding provisions that allow early-stage businesses to offer and sell securities and provided that crowdfunding dollar limits be adjusted for inflation every five years. The SEC issued inflation-adjusted crowdfunding dollar amounts on May 5, 2017, which are reflected below.
"Crowdfunding" generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors. Under SEC rules, the general public can invest in capital raising by start-up companies. This advisory is designed to help the public understand the crowdfunding rules and processes so they can make informed decisions about the risks and rewards of investing in these early-stage businesses.
What Are the Rules?
Title III of the JOBS Act established crowdfunding provisions that allow early-stage businesses to offer and sell securities. The SEC subsequently adopted Regulation Crowdfunding to implement the crowdfunding provisions of the JOBS Act. The role of the Financial Industry Regulatory Authority (FINRA) is to oversee the registration of crowdfunding portals and to ensure that they comply with the federal securities laws and FINRA rules. Broker-dealers and funding portals that are registered with the SEC and are FINRA members are permitted to offer and sell securities on behalf of issuers to the investing public using crowdfunding.
Investors are subject to investment limits that we describe below. Investors should be aware that crowdfunding investments carry significant risk: you can lose some or all of your investment.
Who Can Invest?
Like stocks and bonds, anyone can invest in crowdfunding offerings. But because of the risks involved, you are limited in how much you can invest during any 12-month period in these kinds of securities. The inflation-adjusted investment limits depend on your net worth and annual income:
- If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or five percent of the lesser of your annual income or net worth.
- If both your annual income and your net worth are equal to or more than $107,000 then, during any 12-month period, you can invest up to 10 percent of your annual income or net worth, whichever is less, but not to exceed $107,000.
Say your annual income is $150,000 and your net worth is $80,000. JOBS Act crowdfunding rules allow you to invest the greater of $2,200 or five percent of $80,000 ($4,000) during a 12-month period. So in this case, you can invest $4,000 over a 12-month period.
Know Your Net Worth
To calculate your net worth, add up all your assets and subtract your liabilities. The resulting sum is your net worth. To learn more, read FINRA’s Know Your Net Worth, which includes a worksheet to help with your net worth computation. For purposes of JOBS Act crowdfunding, the value of your primary residence is not included in your net worth calculation.
When you calculate your annual income or net worth, you may include your spouse’s income or assets even if those assets are not held jointly. However, if you use a joint calculation, you and your spouse’s aggregate investment may not exceed the limit that would apply to an individual investor at that income and net worth level.
How to Invest
In addition to investment limits described above, other requirements and procedures have been put in place to protect and inform those who invest in crowdfunding offerings.
Among the most important, you can invest in an offering pursuant to Regulation Crowdfunding only through an online platform of a broker-dealer or a funding portal, a new type of intermediary that was created by the JOBS Act. Companies may not offer crowdfunding investments to you directly—they must use a broker-dealer or funding portal.
The broker-dealer or funding portal must be registered with the SEC and be a member of FINRA. To check registration status and additional information on broker-dealers, visit FINRA’s BrokerCheck. To check if a funding portal is registered, go to FINRA's Funding Portals Web page.
To begin the investment process, you will have to use a new or existing account with the broker-dealer or funding portal. While brokers can offer investment advice and recommendations, funding portals cannot. Also, a funding portal cannot solicit purchases, sales or offers to buy the securities being offered or displayed on the platform.
Be aware that you will be limited in your ability to resell your investment for the first year—and you may need to hold your investment for an indefinite period of time. While you are allowed to transfer shares to certain parties such as a family member or the firm that issued the securities, this may not be easy to do.
Read and Understand Key Disclosure and Education Information
Since crowdfunding investments are likely to be early-stage ventures and may be highly risky, the JOBS Act and Regulation Crowdfunding include provisions designed to inform investors about these investments and their potential risks.
Companies that conduct offerings under Regulation Crowdfunding are required to disclose, among other things:
- A description of the business of the company and its anticipated plan of business, including its name, legal status, physical address and website address.
- A discussion of the material factors that make an investment in the company speculative or risky.
- A discussion of the company’s financial condition.
- The names and positions of the directors and officers; the name of each person who is a beneficial owner of 20 percent or more of the company’s outstanding voting equity securities; and additional information such as the business experience of the directors and officers over the past three years.
- The price of the securities or the method for determining the price.
This information is to be filed in a document called Form C and uploaded to the SEC’s Edgar system for access by investors and crowdfunding intermediaries.
Depending on the amount of money being raised—which includes any amounts raised by the company in the prior 12 months in reliance on JOBS Act crowdfunding—issuers are also required to make certain financial disclosures, including:
|Amount Raised||Inflation-Adjusted Required Minimum Disclosures|
|$107,000 or less||
|$107,000.01 to $535,000||
|$535,000.01 to $1.07 million||
Be aware that an audit of financial statements involves a higher level of scrutiny than a review.
Changing Your Mind
You have up to 48 hours prior to the end
of the offer period to change your mind
and cancel your investment commitment
for any reason. Once the offering period
is within 48 hours of ending, you will not
be able to cancel for any reason even if
you make your commitment during this
If the company makes a material change to
the offering terms or other information
disclosed to you, you will be given five
business days to reconfirm your investment.
Broker-dealers and funding portals that operate Regulation Crowdfunding platforms are required to:
- Provide educational materials to help investors understand this type of investing, as well as make available information about the offering and the company raising the funds (such as Form C).
- Provide communications channels that allow discussions to take place about offerings on the platform.
- Obtain a representation from the investor that he or she understands that they may lose their entire investment, and can bear such a loss.
- Provide prospective investors with questions designed to demonstrate an understanding, among other things, that it may be difficult to resell the securities and that investing in these types of securities involves risk.
While investing in early-stage businesses may bring rewards, it also carries risks. These tips can help you determine if a crowdfunding offering is right for you.
1. Ask yourself if you can handle the risk—and the potential loss of your investment. Both are real possibilities when it comes to companies that issue securities using crowdfunding. The venture may not succeed. Startups and early-stage ventures can and do fail. You should be able to afford, and be prepared to lose, your entire investment. If you are risk-averse, are just starting to invest, have only a little money to invest, or may need the money in the short term, crowdfunding investments likely are not for you.
2. Read and understand the educational and financial information, and all disclosures, provided by the issuer and crowdfunding intermediaries. If you are working with a financial professional, or seeking information over a crowdfunding platform’s communication channel, ask direct questions about the investment, including worst-case scenarios. It’s also a good idea to seek a second, or even third, opinion especially when it comes to highly speculative investments. This might include checking with an accountant who understands financial balance sheets and likely has no vested interest in the investment.
3. Recognize that fraud is a possibility. As with all investment opportunities, the possibility of fraud is real. Protect yourself by understanding the tactics a fraudster might use—and how to avoid them. As noted above, check out investment professionals using BrokerCheck and go to FINRA’s Funding Portals Web page. Under Regulation Crowdfunding, offerings must be conducted through a registered broker or funding portal. A basic Internet search is also valuable. Proceed with caution if you turn up legal or regulatory concerns about company officials, or news reports that raise other red flags.
4. Revisit your financial goals. Setting clear, prioritized goals—each with steps to achieve the goal, a price tag and a time frame—will help guide your investment approach, including whether crowdfunding offerings have a place in your portfolio. Basic strategies such as asset allocation and diversification can help manage risk and make sound investment decisions.What is EquityBender?
However, EquityBender does not (i) offer investment advice or recommendations; (ii) solicit purchases, sales or offers to buy the securities displayed on its platform; (iii) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or (iv) hold, manage, possess, or handle investor funds or securities.
EquityBender does not verify all of the information provided by companies listed on the Funding Portal and makes no assurance as to the completeness or accuracy of any such information. Additional information about companies raising money on the Funding Portal is also available on the SEC’s EDGAR Database. Please review the Form C carefully for a full description of each company and its offering, prior to making any funding commitments.
EquityBender also provides its users with the ability to communicate directly with the company’s management and with others in our investor community to discuss the offering and raise any questions or issues. We encourage our members to interact with companies raising money on the portal and with other registered members.
If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000.
The following table provides a few examples:
greater of $2,200 or 5% of $30,000 ($1,500)
greater of $2,200 or 5% of $80,000 ($4,000)
10% of $107,000 ($10,700)
10% of $200,000 ($20,000)
10% of $1.2 million ($120,000), subject to cap
While your individual circumstances will vary, the following table sets forth examples of calculations under the net worth test in order to determine crowdfunding investment limits:
So, you should pay careful attention emails and notices you received from EquityBender!
- to the company that issued the securities;
- to an accredited investor;
- to a family member;
- in connection with your death or divorce or other similar circumstance;
- to a trust controlled by you or a trust created for the benefit of a family member;
- as part of an offering registered with the SEC.
Therefore, if you have any need for liquidity (ability to sell your securities and use the money for something else) in the near future, you should not invest in crowdfund offerings. You are strongly advised to discuss with your financial advisor.
We also want to note that even after the restrict period ends and you have the right to sell your shares, there is no guarantee that a market will exist and anyone will want to acquire your shares.
Although the offering documents (Form C) are filed with the SEC, neither the SEC nor any other federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any due diligence or the information or materials provided through EquityBender. Investors must be able to afford the loss of their entire investment without a change in their lifestyle.
Before investing, you are strongly advised to review the following additional resources to learn more about risks:
Following completion of an offering conducted through EquityBender, there may or may not be any ongoing relationship between the issuer and the portal. In addition, under certain circumstances an issuer may cease to publish annual reports and, therefore, an investor may not continually have current financial information about the issuer. In some circumstances issuers are permitted by rule to cease filing annual reports, other issuers may completely fail in their obligation to do so.
SAFE = Simple Agreement for Future Equity
A SAFE agreement or "Crowd Safe" is an investment contract between an investor and a start up company; the instrument promises the possibility of a future equity stake, if certain trigger events occur. There is no guarantee that these triggering events will occur. Each company can customize their Safe, therefore terms may vary.
Expanding on the industry standard
The Crowd Safe was created and open-sourced by Republic and is an equity crowdfunding- specific version a SAFE (a financial instrument widely used by angels and VCs investing in startups).
What do I get in return for my Crowd Safe investment?
When you invest with a Crowd Safe, you become an investor, but not an actual shareholder of stock, unless the company elects to convert the Safe into company stock. Since there is a fixed conversion price, you will always receive the same economic outcome (regardless of whether the company elects to convert) if and when there is a liquidity event.
Please note that under the Crowd Safe, an Equity Financing is not a liquidity event, in this case the company can choose to extend the term of the Crowd Safe or convert investors to Shadow Shares.
The company may also choose to include a “valuation cap” or “discount” (or both) in the Safe.
A valuation cap specifies the maximum valuation an investor will convert their investment into shares. At a financing event (specified in the Safe), investors will convert at the lower of the valuation cap or the price in the subsequent financing.
A discount provision gives an investor a discount to the valuation in a future round of financing; the investor will convert their investment into shares (or cash) at the discounted valuation.
When will I earn a return on my investment?
You will not receive a cash or stock return on your investment unless one of the events specified in the Safe offering documents occurs. Generally, you will be waiting for the company to either (a) go public or (b) get acquired by another company. It is important to understand that these securities are not easily traded or sold.
In the event of a subsequent equity financing, the company may elect to “Roll-over” Safe holders and continue the terms of the Safe, or to convert the investment into preferred stock.
If there is a liquidity event during the term of the Safe, you may elect to have your cash returned or to convert the Safe into company stock based on the purchase price and fair market value of the shares.
Please note that there is no guarantee that any of these events occurs; if no subsequent Equity Financing or Liquidity Event occurs, the Crowd Safe will not convert and therefore produce no return. Source: Republic
A safe is a Simple Agreement for Future Equity. An investor makes a cash investment in a company, but gets company stock at a later date, in connection with a specific event. A safe is not a debt instrument, but is intended to be an alternative to convertible notes that is beneficial for both companies and investors.
- Debt instruments have requirements – including regulations, interest accrual, maturity dates, the threat of insolvency and in some cases, security interests and subordination agreements. These requirements can have unintended negative consequences.
- A safe is intended to be simple for both companies and investors, with the usual path to agreement requiring the negotiation of only one item – the “valuation cap.”
- A simple equity security has the potential to become standardized, and a standardized form has the benefits of certainty and speed, which in turn results in lower (or zero) transaction costs for companies and investors.
Most startups need to raise money soon after formation in order to fund operations, and the safe can be a vehicle for investors to fund companies at that very early stage. Unlike the sale of equity in traditional priced rounds of financing, a company can issue a safe quickly and efficiently, without multiple documents and the necessity of a charter amendment. As a flexible, one-document security, without numerous terms to negotiate, the safe should save companies and investors money and time.
The investor and the company agree on the valuation cap, mutually date and sign a safe and the investor sends the company the investment amount. What happens next? Nothing, until the occurrence of one of the specific events described in a safe. In the meantime, an outstanding safe would be referenced on the company’s cap table like any other convertible security (such as a warrant or an option).
Q & A
- Does a safe convert at a round of equity financing? Yes, when the company decides to sell shares of preferred stock in a priced round, an outstanding safe will convert into shares of preferred stock. There is no threshold amount that the company must raise to trigger the conversion.
- What if the pre-money valuation of the company in the financing is higher than the Valuation Cap in a safe? The holder of a safe gets a number of shares of preferred stock calculated using the Valuation Cap, not the higher pre-money valuation. However, the preferred stock that a safe holder is issued will have a liquidation preference that is equal to the original safe investment amount, rather than based on the price of the shares issued to the investors of new money in the financing. This feature means that the liquidation preference for safe holders does not exceed the original investment amount (a 1x preference). For example, if the company issues Series A preferred stock in the financing, a safe holder would be issued Series A-1 preferred stock, the only difference being the name and the share price attributable to that series. See Example 1 in Appendix II.
- What is the difference between Safe Preferred Stock and Standard Preferred Stock? Safe Preferred Stock will be a separate series of preferred stock issued in the Equity Financing, commonly referred to as “shadow preferred” or “sub-series” preferred stock. Safe Preferred Stock will have the same rights, privileges, preferences and obligations as Standard Preferred Stock, but the liquidation preference, conversion price, and dividend rate will be calculated based on the price per share of the Safe Preferred Stock. The price per share of Safe Preferred Stock is determined by dividing the Valuation Cap in a safe by the company’s fully diluted outstanding capitalization (the “Company Capitalization,” described below). See Example 1 in Appendix II.
- What if the pre-money valuation of the company in the Equity Financing is lower than the Valuation Cap in a safe? The Valuation Cap is inapplicable in this situation. A safe holder gets the same preferred stock, at the same price, with the same liquidation preference, as the other investors of new money in the financing. See Example 2 in Appendix II.
- Do safe holders get pro rata rights? Yes, when they become stockholders of the company. As holders of preferred stock, former safe holders will have a pre-emptive right to purchase more shares if and when the company raises another round of financing. This pro rata right must be in either the Equity Financing documents or a side letter. Please consider this pro rata right carefully. There is no dollar threshold on this right – even an investor putting the smallest amount of money into your company will get pro rata rights. If it is not acceptable to you to have every investor holding pro rata rights going forward, consider adding a dollar threshold. See Appendix I for sample language.
- Does a safe holder have a choice about converting a safe in an equity financing? No, conversion in an Equity Financing is automatic and the safe then terminates. A safe is intended to turn safe holders into stockholders.
- What happens to a safe if a company is acquired or merges with another company? In a “change of control” transaction, a safe holder can convert a safe into shares of common stock, calculated based on the Valuation Cap, or have its investment returned. A safe holder will decide which of these two options is more advantageous, depending on the terms of the merger or acquisition. See Example 4 and Example 5 in Appendix II.
- What is the difference between Company Capitalization and Liquidity Capitalization? “Company Capitalization” is the company’s fully diluted outstanding capital stock as calculated at the time of an Equity Financing. If a company intends to adopt an equity incentive plan in connection with the Equity Financing, Company Capitalization includes the shares allocated to that plan. If a company has already adopted an equity incentive plan, Company Capitalization includes all shares reserved under that plan, as well as any plan increases contemplated in connection with the Equity Financing. “Liquidity Capitalization” is a company’s fully diluted outstanding capitalization as calculated at the time of a Liquidity Event. This calculation includes outstanding options (vested and unvested) under an equity incentive plan, but excludes all unissued shares in the plan.
- What happens to a safe if the company goes public? If a company goes public, a safe will convert into shares of common stock calculated based on the Valuation Cap (or the safe holder can cash out the safe).
- Does a safe ever expire? A safe has no maturity date. A safe is designed to expire and terminate only when a safe holder has received stock or cash, in an equity financing, change of control transaction, IPO or dissolution – whichever occurs first. In theory, a safe could remain outstanding for a long time without the need to “extend” any dates or time periods. A safe can be amended by the company and the safe holder, if necessary. See Example 6 in Appendix II.
- What happens to a safe if the company shuts down and goes out of business? In a dissolution, any money that the company has to distribute would be distributed to safe holders before any money is allocated to holders of common stock.
- Can a safe have a discount, or a “Most Favored Nation” provision? This Primer describes a safe with a Valuation Cap only (a “Standard Safe”). Other versions of the safe are described in Appendix I.
Alternative Versions of a Safe
(“Standard” version of a safe is Valuation Cap only)
- Cap and Discount
- This is a safe with a negotiated Valuation Cap and Discount Rate. Either the Valuation Cap or the Discount Rate applies when converting this safe into shares of Safe Preferred Stock.
- The Discount Rate applies to the price per share of the Standard Preferred Stock sold in the Equity Financing. If this calculation results in a greater number of shares of Safe Preferred Stock for the investor, the price per share based on the Valuation Cap is disregarded (and vice versa). See Example 7 in Appendix II.
- The conversion of this safe in a Liquidity Event is the same as a Standard Safe.
- Discount, No Cap
- This is a safe with a negotiated Discount Rate, e.g., a 20% discount off the price per share of the Standard Preferred Stock, applied to the conversion of this safe into shares of Safe Preferred Stock. See Example 8 in Appendix II.
- If the safe is converting in a Liquidity Event, the investor could elect to have the Purchase Amount repaid, or to convert the safe into shares of common stock, based on the fair market value of the common stock at the time of the Liquidity Event with the Discount Rate applied to the common stock price.
- No Cap or Discount, MFN Provision
- This is a safe with no Valuation Cap and no Discount Rate. If the company subsequently issues safes with provisions that are advantageous to the investors holding this safe (such as a valuation cap and/or a discount rate), this safe can be amended to reflect the terms of the later-issued safes. The amendment term is the so-called “MFN Provision.” Note that, unless the later safes include an MFN, the MFN of the original safe is amended away once the safe holder decides the MFN is triggered. In other words, the MFN provision typically provides only one opportunity to amend the original safe, not multiple opportunities as the company continues to issue additional safes.
- If there is an Equity Financing before this safe is amended pursuant to the MFN Provision, the investor would receive the same shares of preferred stock as the investors of new money in the Equity Financing, at the same price. However, this safe does not automatically convert into shares of preferred stock unless the amount of new money raised in the Equity Financing is at least $250,000. This threshold amount provides the investor with some protection against an insignificant equity round raised at an artificially high valuation.
- If there is a Liquidity Event before this safe is amended by the MFN Provision, the investor could elect to have the Purchase Amount repaid, or to convert the safe into shares of common stock, based on the fair market value of the common stock at the time of the Liquidity Event.
Notes about the Pro Rata Right
- If all of your prospective investors want pro rata rights and you agree to give each such investor pro rata rights, use the safe as-is – no changes are required to the template. If this is your decision, be aware that changing your mind about giving these rights at the time of the Equity Financing is not fair to these early investors.
- If you only want to give pro rata rights to certain investors, you can revise the template safe. If you want to use the exact same form of safe for every investor, put in a threshold in the definition of “Pro Rata Rights Agreement” in Section 2 as follows:
“Pro Rata Rights Agreement” means a written agreement between the Company and the Investor (and holders of other Safes, as appropriate), provided the Purchase Amount of this instrument is not less than [$_______________], giving the Investor a right to purchase its pro rata share of private placements of securities by the Company occurring after the Equity Financing, subject to customary exceptions. Pro rata for purposes of the Pro Rata Rights Agreement will be calculated based on the ratio of (1) the number of shares of Capital Stock owned by the Investor immediately prior to the issuance of the securities to (2) the total number of shares of outstanding Capital Stock on a fully diluted basis, calculated as of immediately prior to the issuance of the securities.
- If you want to create a tailored safe for each investor, for any investor to whom you will NOT be giving pro rata rights, edit the template safe to (1) remove Section 1(a)(ii) entirely and (2) remove the definition of Pro Rata Rights Agreement from Section 2. Section 1(a) should look as follows (subsection (i) can be collapsed into subsection (a)):
(a) Equity Financing. If there is an Equity Financing before the expiration or termination of this instrument, the Company will automatically issue to the Investor either: (1) a number of shares of Standard Preferred Stock equal to the Purchase Amount divided by the price per share of the Standard Preferred Stock, if the pre-money valuation is less than or equal to the Valuation Cap; or (2) a number of shares of Safe Preferred Stock equal to the Purchase Amount divided by the Safe Price, if the pre-money valuation is greater than the Valuation Cap. In connection with the issuance of Standard Preferred Stock or Safe Preferred Stock, as applicable, by the Company to the Investor pursuant to this Section 1(a), the Investor will execute and deliver to the Company all transaction documents related to the Equity Financing; provided, that such documents are the same documents to be entered into with the purchasers of Standard Preferred Stock, with appropriate variations for the Safe Preferred Stock if applicable, and provided further, that such documents have customary exceptions to any drag-along applicable to the Investor, including, without limitation, limited representations and warranties and limited liability and indemnification obligations on the part of the Investor.
**Please note that many of the numbers discussed below are rounded**
- Investor has purchased a safe for $100,000. The Valuation Cap is $5,000,000.
- The company negotiates with investors to sell $1,000,000 worth of Series A Preferred Stock at a $10,000,000 pre-money valuation. The company’s fully-diluted outstanding capital stock immediately prior to the financing, including a 1,000,000 share option pool to be adopted in connection with the financing, is 11,000,000 shares.
The company will issue and sell 1,100,110 shares of Series A Preferred at $0.909 per share to the new investors. The company will issue and sell 220,022 shares of Series A-1 Preferred to the safe holder, at $0.4545 per share.
In the safe, the Series A Preferred is referred to as “Standard Preferred Stock” and the Series A-1 Preferred is referred to as “Safe Preferred Stock.” The table below sets forth a comparison between the Standard Preferred and the Safe Preferred, as each would be described in the company’s certificate of incorporation:
|Standard Preferred Stock||Safe Preferred Stock|
|Liquidation preference on a per share basis:||$0.90||$0.4545|
|Aggregate payout in a change of control transaction (each series pari passu with the other):||$1,000,000||$100,000|
|Conversion price and original issuance price at the time of the Series A Preferred financing:||$0.90
(initially converts into 1,100,110 shares of common stock)
(initially converts into 220,022 shares of common stock)
|Dividend Rate per share (based on an 8% dividend):||$0.072||$0.036|
- Investor has purchased a safe for $100,000. The Valuation Cap is $4,000,000.
- The company negotiates with investors to sell $600,000 worth of Series AA Preferred Stock at a $3,000,000 pre-money valuation. The company’s fully-diluted outstanding capital stock immediately prior to the financing, including a 500,000 share option pool to be adopted in connection with the financing, is 12,500,000 shares.
The company will issue and sell 2,500,000 shares of Series AA Preferred at $0.24 per share to the new investors. The Company will issue and sell an additional 416,666 shares of Series AA Preferred to the safe holder at the same price per share. There is no difference between the Series AA Preferred issued to the new investors and the Series AA Preferred issued to the safe holder, and the references to “Safe Preferred Stock” in this case are inapplicable.
- Investor has purchased a safe for $100,000. The Valuation Cap is $8,000,000.
- The company negotiates with investors to sell $2,000,000 worth of Series A Preferred Stock at an $8,000,000 pre-money valuation. The company’s fully-diluted outstanding capital stock immediately prior to the financing, including a 1,500,000 share option pool to be adopted in connection with the financing, is 11,500,000 shares.
The company will issue and sell 2,875,215 shares of Series A Preferred at $0.6956 per share to the new investors. The company will issue and sell an additional 143,760 shares of Series A Preferred to the safe holder at the same price per share. As in Example 2, there is no difference between the Series A Preferred issued to the new investors and the Series A Preferred issued to the safe holder.
- Investor has purchased a safe for $100,000. The Valuation Cap is $10,000,000.
- Another entity proposes to acquire the company for cash consideration of $50,000,000. The company’s fully-diluted outstanding capital stock immediately prior to the acquisition, including 1,500,000 outstanding options but excluding any unallocated shares in the option pool, is 11,500,000 shares.
The investor can choose to have the safe purchase amount returned, or convert the safe into shares of common stock and receive the cash consideration with the other common stockholders. The safe would convert into 115,008 shares of common stock, based on the “Liquidity Price” of $0.8695 per share (the Liquidity Price is calculated by dividing 10,000,000 by 11,500,000). When the $50,000,000 deal consideration is allocated pro rata among all of the common stockholders, including the investor (and assuming the outstanding options are all exercised), the investor would receive approximately $495,074. Since this amount is considerably more than the $100,000 purchase amount, the investor would elect to convert the safe.
- Investor has purchased a safe for $100,000. The Valuation Cap is $6,000,000.
- Another entity proposes to acquire the company for cash consideration of $200,000. The company’s fully-diluted outstanding capital stock immediately prior to the acquisition, including 795,000 outstanding options but excluding any unallocated shares in the option pool, is 10,795,000 shares.
The investor can choose to have the safe purchase amount returned, or convert the safe into shares of common stock and participate pro rata in the cash consideration with the other common stockholders. The safe would convert into 179,920 shares of common stock, based on the “Liquidity Price” of $0.5558 per share (the Liquidity Price is calculated by dividing 6,000,000 by 10,795,000). When the $200,000 deal consideration is allocated pro rata among all of the common stockholders, including the investor (and assuming: (1) the outstanding options are all exercised; (2) there is no outstanding debt; and (3) for purposes of this example, there is only the one outstanding safe), the investor would receive approximately $3,274. This dollar amount is calculated by dividing the $200,000 deal consideration among 10,974,920 shares of outstanding common stock, resulting in $0.0182 per share (179,920 shares multiplied by $0.0182 = $3,274.54). Since this amount is considerably less than the $100,000 purchase amount, the investor would elect to cash out the safe in connection with the transaction.
- Investor has purchased a safe for $100,000. The Valuation Cap is $7,000,000.
- The company grows, generates revenue and becomes cash flow positive, and therefore does not need to raise outside capital. The company has no acquisition offers and no plans to go public.
The safe will remain outstanding until the company has a liquidity event, even if that liquidity event doesn’t happen for years after the original date of purchase.
- Investor has purchased a safe for $100,000. The Valuation Cap is $8,000,000 and the Discount Rate is 85%.
- The company has negotiated with investors to sell $1,000,000 worth of Series A Preferred Stock at a $10,000,000 pre-money valuation. The company’s fully-diluted outstanding capital stock immediately prior to the financing, including a 1,000,000 share option pool to be adopted in connection with the financing, is 11,000,000 shares.
The company will issue and sell 1,100,110 shares of Series A Preferred at $0.909 per share to the new investors. The company will issue Series A-1 Preferred to the safe holder, based on the Valuation Cap or the Discount Rate, whichever results in a lower price per share. The 15% discount applied to the per share price of the Series A Preferred is $0.77265. The Valuation Cap results in a price per share of $0.72727. Accordingly, the company will issue 137,500 shares of Series A-1 Preferred to the safe holder, at $0.72727 per share. The Discount Rate does not apply in this case.
- Investor has purchased a safe for $20,000. The Discount Rate is 80%.
- The company has negotiated with investors to sell $400,000 worth of Series AA Preferred Stock at a $2,000,000 pre-money valuation. The company’s fully-diluted outstanding capital stock immediately prior to the financing is 10,500,000 shares.
The company will issue and sell 2,105,263 shares of Series AA Preferred at $0.19 per share to the new investors. The 20% discount applied to the per share price of the Series AA Preferred is $0.152. Accordingly, the company will issue 131,578 shares of Series AA-1 Preferred to the safe holder, at $0.152 per share.
 For example, the California Finance Lenders Law.
 $250,000 is a suggested threshold, but can be changed if the parties desire.