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06/01/2021 - Wefunder SAFE Investments Explanation

 
 

For those who invested in Pure-Light® Technologies, Inc. via Wefunder
 
Except for a few investors, almost all of those who participated in the 2020 Pure-Light Crowdfunding (CF) effort, invested using a S.A.F.E. (Simple Agreement for Future Equity) investment option.  Which means that the stock for them is held by Wefunder, until a large Accredited Investor invests at a later date.  The price of the stock is then set, the SAFE is closed, and the stock is issued.
 
Below is a more detailed explanation:
 
What is a SAFE?
A SAFE grants an investor the right to obtain equity at a future date if the startup sells shares in a future financing. It has been historically used by top startups in Silicon Valley raising money from accredited angel investors. You should only invest in a SAFE if you believe that the startup can raise financing in the future from professional investors.
 
Early-stage startups use SAFEs to delay the difficult task of figuring out how much a startup is worth. It's also a much cheaper and simpler contract than priced equity rounds, which may require months of negotiation and upwards of 30 pages of legalese costing tens of thousands of dollars.
 
The number of shares you receive is determined at the next priced financing when professional investors – typically venture capitalists – set the price for preferred stock. Then, calculated by using the Valuation Cap and sometimes the Discount Rate, your SAFE often converts into shares at a lower price than the venture capitalists paid, since you invested earlier.
 
The Valuation Cap is the most important term in this security. It puts a maximum price on the price of the stock - the lower the price, the more shares you will get. If you invest in a startup with a valuation cap of $8 million, and they later raise at a $20 million Pre-Money Valuation, the amount of stock you'll get will be priced off the $8 million number. But, if the next investors value the company at $4 million, that will be your price instead (perhaps further discounted by the Discount Rate).
 
Unlike a Convertible Note, a SAFE is not a loan. As such, it does not accrue interest, have a maturity date, or have a legal obligation to be paid back. This makes it a simpler and cheaper way to finance a startup, and it typically better aligns with the intention of most early stage equity investors who never intended to be lenders (convertible notes are rarely if ever paid back in cash despite being a debt instrument – the startup just goes bankrupt).
The Origin of the Simple Agreement for Future Equity (“SAFE”)
SAFEs, like warrants, create an option to buy equity in the future. Overall a founder-friendly instrument, the agreement offers no interest rate or term, thus significantly distinguishing the product from convertible notes. Founders are not faced with the ticking time bomb of a maturity date. Both convertible notes and SAFEs, however, defer valuation decision-making to a later date. Valuation caps and discounts are similarly elective.
Arguably, early investors who invest via SAFEs may see their upside limited despite taking on significant early risk. Even with the inclusion of valuation caps and/or discounts, there is no timeline to liquidity.
Companies raising capital under Reg CF have apparently dismissed the shortcomings of SAFEs from the investor’s perspective. SAFEs were the instrument of choice for 12 of 40 Reg CF issuers to date.  All Reg CF SAFE issuers listed their offerings on the Wefunder portal. 
Why have Reg CF issuers chosen to offer SAFEs 
The dominant choice among Reg CF issuers to offer SAFEs has various possible explanations.
  • Offering SAFEs instead of convertible notes is likely more cost effective to the issuer. All current Reg CF issuers of SAFEs are listed on the Wefunder portal and more than half have explicitly elected to utilize the simple Wefunder SAFE. 
  • Another possibility is that the issuer's legal counsel advised that the company’s early seed status and low minimum raise amount make them a good candidate for fundraising with SAFEs. 
  • Another explanation, while less likely, is that issuers believed that their followers were so motivated to participate in their companies’ success that they were not concerned with the downside of investing in SAFEs.
Finding Your Investment In Pure-Light Technologies on Wefunder
If you are an investor in the Pure-Light Technologies offer on the Wefunder Platform then you can sign into your Wefunder account and view your investment in the Pure-Light Technologies SAFE. This will detail your investment.
 
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