How to add a SAFE in Carta?

Navigating equity management is often complex. However, a top-tier equity management tool like Carta offers a streamlined solution to simplify the process. 

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For early-stage startups, SAFE (Simple Agreement for Future Equity) is one hassle-free financial instrument option you can use in raising funds, and Carta allows you to incorporate this into your company’s equity management.

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So, in this comprehensive guide, we'll provide you with step-by-step instructions on how to seamlessly integrate a SAFE agreement into Carta for your company. 

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What is a SAFE?

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Basically, a SAFE is a financial instrument commonly used in early-stage financing, particularly in startup ecosystems. It was introduced as an alternative to traditional convertible notes.

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As a business owner, you need funds to clear human resource expenses on one end and your products or services on the other end. But here's the catch: it can be quite challenging for you to get new investors interested if you can't talk about how much your company is worth or how well it's doing just yet. 

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Attracting them can prove challenging without the ability to discuss valuation and performance indicator data. Sounds like a real headache, right? But that's where SAFE shows up as the perfect equity offer in such a situation. 

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SAFE provides the investor with the right to obtain equity in the company at a later date, typically upon the occurrence of a future financing round, a liquidity event, or a specified date. For you, as the founder, the purpose of a SAFE is to provide a straightforward and standardized way to raise capital without having to go through the complexities and legal costs associated with issuing equity or convertible debt. 

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Let's do a bit of history: 

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The SAFE was created by Y Combinator in 2013. It was introduced as a better alternative to convertible notes, aiming to simplify the fundraising process for startups and investors. 

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The concept behind the SAFE was to create a standardized, founder-friendly investment instrument that would provide a straightforward way for startups to raise capital without the complexities often associated with traditional financing methods.

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And you may ask, what are convertible notes and how are SAFEs different from them? 

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Convertible notes represent short-term debt instruments that transform into equity following a predetermined event, commonly triggered by a priced financing round or a liquidation occurrence such as an acquisition.

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In contrast, SAFE agreements differ from convertible notes as they do not function as debt instruments. Moreover, they tend to be more straightforward and briefer in nature. It's this simplicity that primarily benefits both founders and investors.

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But convertible notes are not the only concepts that will shape your understanding and decision-making. To be able to make a more informed assessment and determine whether this is the right fundraising instrument for you, you need to understand SAFE key terms and how they play out. 

Understand the Key Terms of Your SAFE and how they affect your decision-making. 

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1. Valuation Cap: The valuation cap sets the upper limit on your company's valuation in a subsequent funding round. In other words, it acts as a ceiling on the valuation used to determine the number of shares the investor will receive upon conversion. Suppose the company's valuation in the subsequent financing round exceeds the valuation cap specified in the SAFE agreement. In that case, the investor will convert their investment at the lower, capped valuation, thus potentially receiving more shares for their investment.

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2. Discount Rate: The discount rate is another feature of a SAFE agreement that represents the percentage discount at which the investor's investment will convert into equity compared to the valuation established in the subsequent priced equity financing round.

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In simpler terms, it shows how much cheaper the investor's shares will be compared to what others pay in the next funding round.

For example, if the discount rate is set at 20%, it means that the investor's investment will convert into equity at a 20% discount to the valuation of the company in the subsequent financing round. 

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This discount is a reward for the investor's early commitment and the associated risk of investing in the company before it achieves a higher valuation.

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3. Conversion Date: The conversion date is the point in time when the investor's investment in the company converts from a SAFE agreement into equity. Typically, this conversion occurs during a subsequent priced equity financing round, but it can also be triggered by other events specified in the SAFE agreement, such as a liquidity event or the passage of a certain period of time. The conversion date marks the transition from a debt-like instrument (the SAFE) to an ownership stake in the company, entitling the investor to the rights and privileges associated with equity ownership.

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Understanding the terms of your SAFE ensures that you are fully aware of the rights and obligations associated with the agreement, helping you make informed decisions about your investment or fundraising strategy. You can mitigate the risk of misunderstandings or disputes down the line, fostering a transparent and mutually beneficial relationship between investors and founders. Furthermore, you can effectively assess its implications on your company's capital structure and future equity distribution, enabling you to strategize accordingly.

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In essence, you don't want to go into this agreement blindly. Generally, investments are a risk. For SAFEs, the agreement is basically hinged on a promise without substance, yet. So, while your potential investors will be on their toes to secure their stake in that obscure future, you don't want to be carried away by the present benefits of having their funds at your disposal. 

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Not only is Carta a powerful tool for integrating SAFEs into your equity management, but it ensures proper set-up and helps you keep track of agreements and development from launch to maturity. 

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Preparing to Add a SAFE in Carta

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Before entering a SAFE on Carta, you would typically need the following details:

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1. Your Information (Issuer Information): This usually includes;

• The legal name of your company.
• Company's Tax ID or Employer Identification Number (EIN).
• Registered address of the company.

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2. Investor Information:

• The legal name of the investor or entity investing in the SAFE.
• Contact information of the investor (email, phone number).
• If applicable, the investor's Tax ID or EIN.

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3. SAFE Details:

• SAFE issuance date.
• SAFE amount (the investment amount in the SAFE).
• SAFE valuation cap
• SAFE discount rate 
• SAFE maturity date 

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4. Additional Terms:

• Any specific terms or conditions agreed upon between the issuer and the investor.
• Any conversion provisions or events triggering the conversion of the SAFE into equity.

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5. Signatories:

• Names and signatures of authorized representatives from both the issuer and the investor.
• Date of signing.

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6. Payment Information:

• Details regarding the payment method for the investment, including wire transfer instructions or any other preferred method.

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7. Legal and Regulatory Compliance:

• Compliance with securities regulations and any necessary legal documentation required by regulatory bodies.

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Adding a SAFE in Carta

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• Login into your account and ensure that a company signatory has been added to your profile (Check the FAQ section on how to add a signatory)
  

• Go to the Dashboard menu and scroll down to the Fundraising option. 
• When you click on Fundraising, you will be presented with a list of options with SAFE Financing as one of them. Click on SAFE Financing. 
• Click on Create SAFE

• Provide your Financing information, ensuring that you fill out all fields marked with an asterisk. Your financial information includes;
  

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1. Safe document template: You have the option to select either a Carta or Y Combinator Post Money template, both of which come with predefined terms and conditions. Alternatively, you can opt for a Custom SAFE template 
2. Dilution type (pre-money or post-money)
3. Governing law: Select the state or U.S. territory that governs the legal aspects of your SAFE agreement
4. Side letter (optional): adding a side letter can add extra terms or benefits to your SAFE without changing the core agreement. You have three options for additional agreements:

           a) Omit side letter (if you prefer not to include any additional terms).

            b) Choose Carta Pro Rata Agreement (to utilize Carta's predefined Pro Rata Agreement).

            c) Choose a Custom side letter (if you have your own customized terms).

5. Valuation cap
6. Discount
7. Investment amount

• The document preview on the right will update in real-time as you enter your details. Once you have completed the form, click "Next: Investor information" to proceed.
• Select the investor type: Individual or Non-individual

• Click payment and enter your payment information and verify 
• Click preview
• You can review the new SAFE information and the email the investor will receive through the links that will be displayed on your screen. 
• If you are satisfied with everything, check the terms and conditions to ensure you are on board. 
• Click send to investor

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Post-Entry Actions

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Upon successfully creating your new SAFE, you should be on your toes for changes and triggers and in close contact with your investors. It's a given. However, close and intentional monitoring 

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• Monitor SAFE Conversion Triggers: SAFE Conversion Triggers are events that activate the conversion of a SAFE into the capital stock of the company, which may include Equity Financing, Dissolution, or Liquidity. To effectively track events that could trigger the conversion of the SAFE to equity, consider the following:

1. Creating a monitoring system, such as setting up alerts, calendar reminders, or using specialized software to track these milestones.
2. Stay informed about industry news, market trends, and regulatory changes that could impact the company's financial status or trigger conversion events.

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• Communicate with Investors.

Keeping investors informed about their SAFE is crucial for transparency and accountability. It ensures that investors know their stake in the company and have visibility into their investment status. Regular updates help foster trust and confidence among investors, demonstrating the company's commitment to transparency and professionalism.  Overall, timely updates regarding recording SAFEs in Carta contribute to a positive investor experience and strengthen the investor-founder relationship.

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• Seek support from Carta's support center: when in doubt, consult legal and financial professionals with expertise in venture capital, startup financing, and securities law to ensure accurate interpretation of conversion triggers and compliance with relevant regulations.

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• A good thing is that Carta has a Fundraise Insights tool you can use to enhance your startup's decision-making process and gain a competitive advantage with industry data. With it, you also gain access to tailored insights for your SAFE round, effortlessly compare terms with current benchmarks, and even begin drafting directly from the results page.

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FAQs

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1. How can I add a signatory to my Carta company account? 

• Login to your account and go to company settings on your dashboard 
• From the Users & Permissions tab, click "signatories" 
• Select the Company user from the dropdown to designate as the signatory of each issuance type. Click Update signatories at the bottom of the page to save any changes.

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2.  Can I edit or modify a SAFE after adding it to Carta?

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Yes, you can edit certain details of a SAFE after adding it to Carta, such as updating the issuance date or making changes to the terms. However, any modifications should be made carefully and documented accurately. 

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3. How do investors view their SAFEs in Carta?

After your signatory verifies the SAFE Information, check the boxes after reviewing the terms and conditions, type their name exactly as it appears beneath the signature line, and finally, click Agree and sign, the SAFE will then be sent to the investor for signature and funding. Once funds have been received, the SAFE will be executed. You can also view the status of issued SAFEs at any time through the SAFE Financings page.

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4. Can I generate reports or documents related to SAFEs in Carta?

Yes, Carta provides tools for generating reports and documents related to SAFEs, such as investment summaries, cap tables, and transaction histories. These can be useful for record-keeping and communication with investors.

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Bonus tips: you may experience some common issues such as login or access issues and documentation errors during the process of adding SAFEs to Carta. If you do, here are some troubleshooting tips that might help:

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1. Login or Access Issues:

Ensure that you are using the correct login credentials for your Carta account. If you're having trouble logging in, try resetting your password or contacting Carta's support for assistance.

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2. Incomplete or Incorrect Information:

Double-check that all required fields are filled out accurately when adding a SAFE in Carta. Missing or incorrect information can cause errors or delays in the process. Refer to the SAFE agreement and consult with legal counsel if needed to ensure all details are entered correctly.

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3. Technical Glitches:

If you encounter technical issues or glitches while adding a SAFE in Carta, try refreshing the page or logging out and logging back in. If the problem persists, contact Carta's support team for assistance. Be sure to provide details about the issue you're experiencing for faster resolution.

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4. Document Upload Errors:

If you need to upload documents related to the SAFE agreement and encounter errors, make sure the file formats are supported by Carta (e.g., PDF, Word). Check the file size limits and ensure that the documents are not corrupted. If you continue to experience issues, try uploading the documents from a different device or browser.

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5. Legal Compliance Concerns:

If you're unsure about the legal compliance of the SAFE terms or the process of adding SAFEs in Carta, seek guidance from your company's legal professionals familiar with securities regulations. They can review the terms of the agreement and provide advice on how to proceed in compliance with applicable laws.

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6. Investor Communication Problems:

   If investors are having trouble accessing or viewing their SAFEs in Carta, it may come from your end, since completion of your SAFE automatically sends them mail. However, they should reach out to Carta's support team directly if they encounter any issues or need assistance.

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7. Data Accuracy and Consistency:

Regularly review and update the information related to SAFEs in Carta to ensure accuracy and consistency. Any discrepancies or outdated information can cause confusion or problems down the line, so it's essential to maintain accurate records and promptly address any discrepancies that arise. Use Carta's Insight Tool and reach out to customer support for more help. 

Conclusion 

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Accurately adding SAFEs in the Carta and maintaining meticulous records is paramount for effective equity management. Not only does it ensure compliance with regulatory requirements, but it also enhances transparency for investors, facilitates accurate equity tracking, supports proper valuation and reporting, strengthens investor relations, and prepares the company for future financing rounds.
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Note: Our content is for general information purposes only. Levy does not provide legal, accounting, or certified expert advice. Consult a lawyer, CPA, or other professional for such services.