Tron Won’t Change Warren Buffett’s Mind On Crypto

+ Early Investing Co-Founder Adam Sharp

Q: What is the upside of a crowd SAFE (Simple Agreements for Future Equity)? It can go to zero like everything else. And it seems possible that the company could decide not to allow you in, thus denying you any upside. A crowd SAFE also seems to have a limited, fixed upside. Say you get a 20% discount and then it goes public. The two scenarios appear to be the discount model vs. the IPO model. There is some return, but it does not seem to be all that much considering the significant risk.

A: Before we get to upside, let’s talk about what a crowd SAFE is. A crowd SAFE is similar to a convertible note in a few ways (see my previous Mailbag on convertible notes here). Like a convertible note, a crowd SAFE is designed primarily for the benefit of the founder and not the investor. A future triggering event converts your investment into equity. Most include a market cap and discount. And, as with a convertible note, your investment is not buying equity. It’s buying the promise of equity if and when a triggering event (as defined by the company) occurs.

A crowd SAFE does NOT convert if the startup never does another raise or fails to IPO. This is the same risk you assume with a convertible note.

A crowd SAFE is different from a convertible note in two major ways. The biggest being that with a crowd SAFE, you’re not making a loan. There are no interest rates. You’re entering into a “contractual agreement” with the startup along with dozens or hundreds of other investors participating under the same contract. Crowd SAFE participants are lumped into a single entity on a startup’s cap table.

The other big difference involves the terms of the triggering event. A triggering event under a crowd SAFE is more variable and customized to the desires of each startup than one under a convertible note. So investors have to pay attention to exactly what constitutes a triggering event. Is it an IPO? A buyout or merger? Or a future raise?

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