What Is A SAFE and How Did Lawyers Get Their Sticky Hands on Them?

A financial tool crafted for simplicity is now stuck in legal complexities. How did lawyers complicate a straightforward solution?

A Simple Agreement for Future Equity (SAFE) is meant to make startup financing straightforward. Yet, the legal landscape around SAFEs has become anything but simple. It was originally a quick and easy way to get early funding. But, it has evolved into a maze of legal rules that differ from its initial simplicity.



Understanding SAFEs

A SAFE was created by the startup accelerator Y Combinator as a financial tool to streamline investment into startups. It is a non-debt financial option. It converts into equity upon future triggers. These triggers usually occur during later funding rounds. Such a setup benefits both startups and investors. It avoids immediate valuation debates, and simplifies the investment process.



Lawyers’ Legal Modifications Changed SAFEs

Lawyers have greatly influenced the evolution of SAFEs. They often add complex clauses that can change basic parts of these agreements. Changes to valuation caps, conversion mechanisms, and other legal details make a simple agreement complex. They may also tilt the balance in favor of investors.



Common Pitfalls in SAFE Agreements

The increasing legal complexity of SAFEs can lead to significant pitfalls. Startups may find themselves locked into bad terms. They may struggle with high valuation caps or face unexpected dilutions. Recognizing these risks is crucial. You must understand the fine print of modified SAFE agreements. This understanding is necessary to avoid scenarios where the tool becomes more of a liability than an asset.



Lawyers Have Their Motives

Why do lawyers complicate these agreements? Often, it’s about ensuring thorough client protection. This protection usually aligns with investor interests. Or, it’s just a way to bill more hours. This can create a conflict of interest. The push for complexity doesn’t fit the startup’s needs. They need simplicity and clarity.



Strategies for Cutting Through Legal Jargon

Navigating SAFEs effectively requires a focus on simplicity and clarity. Startups must approach SAFEs with a critical eye, questioning each clause and its necessity. They should also learn about valuation caps and specific triggering conditions. Investors should prioritize transparency and fairness to maintain healthy business relationships. Consult with legal experts who specialize in startups. They are not generalists. They can provide tailored and effective guidance.



Concluding Insights – Aim for Clarity and Simplicity

SAFEs were designed to benefit both startups and investors by simplifying the early investment process. But, they have become complex and need careful navigation. Startups and investors need to approach SAFEs with clear understanding. They must be proactive. This will ensure they serve their original purpose of helping, not complicating, investments.



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Table of Contents

How Many Shares Should Your Startup Authorize Upon Launch

New startups often launch with 10 million authorized shares. Founders often ask me, “Why 10 million shares?”  Before answering how many shares of stock a new startup should issue, founders must first understand the difference between authorized, issued, and outstanding shares.  What Is The Difference Between Authorized, Issued, and Outstanding Shares? The number of authorized shares is the maximum number of shares that a corporation is legally allowed to issue to its investors and stockholders.  When a corporation is formed, founders will submit a certificate of incorporation (also called the “charter”) to the appropriate Secretary of State.  Among other things, the charter includes the maximum number of shares that the corporation is authorized to distribute or “issue.”  Issued Shares are the number of authorized shares that the corporation has actually issued to all its stockholders. Legally speaking, the number of issued shares cannot be greater than the number of authorized shares.   Outstanding shares are the issued shares that are currently outstanding. After being issued, a corporation may buy back shares that then are no longer outstanding.   Think Of The Number Of Authorized Shares As Your Company’s Share “Limit”  The number of authorized shares is much like a credit limit on a credit card.  Let’s say you have a $5,000 credit limit and your ABC Corporation only has 5,000 shares authorized.  The $5,000 limit is like the number of authorized shares — you cannot spend more than $5,000 credit limit, just like ABC Corporation cannot sell or grant more than 5,000 shares.   Starting with its 5,000 authorized shares, let’s say ABC Corporation issues 2,600 shares. This is like the company spending $2,600 of its $5,000 “credit limit.”  You have $2,400 left to spend in your credit line, and ABC Corporation has 2,400 shares left to issue.  Issuing more shares than there are authorized makes those additional shares voidable.  To issue more shares once you have reached the authorized limit, you need to amend the corporation’s charter, which usually requires approval from the board of directors and at least a majority of the existing stockholders (or whatever approval process the company’s charter or bylaws states).   The stockholders might not be eager to approve of this change because increasing the number of authorized shares allows for the possibility to issue more shares that can dilute the ownership of existing stockholders.   How Many Shares Do Startup Founders Need To Issue?  The commonly accepted standard for new companies is 10 million shares.  When you build a venture-backed startup designed to scale, you will need to issue shares to an increasing number of employees.   Authorizing 10 million shares means it will be unlikely you’d ever need to offer someone a fraction of a share.  A company can grant 10,000 shares to an employee which represents just 0.1% of 10 million shares.  Psychologically, that works much better than giving ten shares which would be 0.1% of 10,000 shares.   Also, the price per share will be lower.  Let’s say two companies are each worth $1 million.  One company has authorized and issued 10 million shares, while another has authorized and issued 1,000 shares.  The first company would have a price per share of 10 cents per share.  The second company would have a price per share of $1,000.  As an investor, it can “feel” better to buy at a lower price.  The quoted examples assume that the number of issued shares is at the maximum number of authorized shares.  Out of a company’s 10 million authorized shares, founders are typically issued anywhere from 5 to 7 million shares.  This practice makes sure that the founders always own a majority of the issued shares even when all 10 million shares have been allocated.   To incentivize employees, startup founders reserve a percentage of the company to issue employees stock options or other equity incentives.  This reserved number of shares is called the “option pool” and is most commonly the number equal to 10 to 20% of the currently issued shares.   The remaining number of authorized shares that are not issued or reserved for issuance is available to investors, usually as preferred stock.   How Do You Calculate The Ownership Percentage Of A Startup’s Shares?  When calculating the percent ownership of a corporation, do not count the authorized shares. Instead, focus on the number of issued shares.  In the example of a startup with 10 million authorized shares, 6 million are issued equally between two founders so that each founder owns 3 million shares, or 50%, of the company.  If the founders wish to have a 10% option pool for employees, 600,000 shares are reserved for issuance as stock options (or other equity incentives).   Please note that stock options give the right to purchase shares of stock but are not actually shares of stock, so a holder of stock options has no ownership in the company until the stock option is exercised.   Summary  Investors are used to seeing 10 million shares, but you can choose any number to authorize.  The key is to have enough shares to issue additional shares to incentivize employees and to raise funds from investors without immediately having to amend your charter every time you wish to issue additional shares.   This article lays out the distinction between authorized and issued shares as well as some strategies related to allocating them, but please note that this post (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from qualified professionals.  LegalMente AI – The One-Stop AI Legal ShopTM Lawyers are expensive. If you’re tired of high legal costs, you should consider using AI to help.  LegalMente AI® uses artificial intelligence to reduce the cost of legal work for small businesses, startups, healthcare, and individuals.  LegalMente’s software uses patent pending RedFlag DetectionTM AI technology to read and analyze common legal contracts with accuracy and speed.

The 83(b) Election- What Startup Founders Need to Know

There’s a critical choice founders must make when making a Section 83(b) election. The 83(b) election is a provision under the Internal Revenue Code that gives an employee or startup founder the option to pay taxes on the total fair market value of restricted stock at the time of granting.  If one waits too long to decide, founders or employees granted company stock could face some profound tax implications.   Let’s start with the basics.  What is Restricted Stock?  While many startup companies give stock options to employees, some grant restricted stock to its founders and certain employees. Restricted Stock is granted to a stockholder but limited in that it cannot be transferred or sold by that stockholder and may even be taken back by the company until certain conditions are met. Once met, the stock is released from the restrictions and said to be “vested.”   If you are granted restricted stock, filing an 83(b) election might save you money on taxes, especially if you think the stock will become more valuable (and hence, result in a higher tax bill).  It’s helpful to know how these elections work and when they may be useful. The steps required to file an 83(b) election are relatively simple.    Should I file an 83(b) election?   After you are granted restricted stock, you have 30 days to send an 83(b) election letter to the IRS to let them know that you want the stock to be taxed on the date it was granted. Otherwise, you will pay taxes on the date the stock vests.  However, 83(b) elections may not be advantageous in every scenario. When deciding whether to file an 83(b) election, consider:     How can I file an 83(b) election?  If you decide to file, you should consult with a tax or legal professional to ensure that you correctly complete the process. To give you an idea of what’s involved, the necessary steps are:  This article is not provided in the course of and does not create or constitute an attorney-client relationship. It is not intended as a solicitation, is not intended to convey or constitute legal advice, and is not a substitute for obtaining legal or tax advice from qualified professionals. LegalMente AI – The One-Stop AI Legal ShopTM Lawyers are expensive. If you’re tired of high legal costs, you should consider using AI to help.  LegalMente AI® uses artificial intelligence to reduce the cost of legal work for small businesses, startups, healthcare, and individuals.  LegalMente’s software uses patent pending RedFlag DetectionTM AI technology to read and analyze common legal contracts with accuracy and speed. Our AI Paralegal, ParaTM, can answer legal questions, analyze multiple file types, and help you form a business.  Our Pre-Drafted Legal Document Templates contain templates for common legal contracts such as NDAs, BAAs, and SAFEs. And LegalMente AI can also help connect you to licensed attorneys. 

How to Form an LLC – Key Steps You Must Know

Choosing the right legal structure is a critical decision for business owners in the US, and one of the most popular options is forming a Limited Liability Company (LLC).    An LLC offers several advantages, including personal liability protection, flexibility in management, and various tax options. Unlike sole proprietorships, an LLC shields personal assets from business debts and legal liabilities.   Additionally, members can choose whether to be taxed as a sole proprietorship, partnership, or corporation, depending on their financial goals.  Types of LLCs Not all LLCs are created equal. There are several types of LLCs to consider, and choosing the right one is crucial for your business structure:   Steps to Form an LLC in the United States  Additional LLC Responsibilities Forming an LLC comes with ongoing responsibilities such as filing annual reports, paying state fees, and maintaining proper records. The costs vary by state, so be sure to check local requirements. For businesses operating in multiple states, “foreign qualification” might be required to do business legally across state lines. Keeping accurate records and consulting with an attorney or legal professional is essential to ensure compliance.  Is an LLC Right for You? Deciding to form an LLC depends on your business goals. If you’re looking to protect your personal assets, offer flexibility in taxation, and simplify management, an LLC might be the perfect fit. However, it’s vital to assess your situation with professional advice to ensure you’re making the right choice for your business. LegalMente AI – The Future of Legal Work Traditional legal services have their place. However, high legal costs and inefficiencies are hard to ignore. Dealing with contract review doesn’t have to drain your wallet. LegalMente AI offers an innovative solution that addresses these challenges head-on. It provides quick, accurate, and cost-effective contract reviews.   Step up to smarter, more affordable legal reviews with LegalMente AI. Sign up for a free user account today and say goodbye to those endless legal bills. LegalMente AI is free to use for everyone so you can start saving money today. 
How Many Shares Should Your Startup Authorize Upon Launch

New startups often launch with 10 million authorized shares. Founders often ask me, “Why 10 million shares?”  Before answering how many shares of stock a new startup should issue, founders must first understand the difference between authorized, issued, and outstanding shares.  What Is The Difference Between Authorized, Issued, and Outstanding Shares? The number of authorized shares is the maximum number of shares that a corporation is legally allowed to issue to its investors and stockholders.  When a corporation is formed, founders will submit a certificate of incorporation (also called the “charter”) to the appropriate Secretary of State.  Among other things, the charter includes the maximum number of shares that the corporation is authorized to distribute or “issue.”  Issued Shares are the number of authorized shares that the corporation has actually issued to all its stockholders. Legally speaking, the number of issued shares cannot be greater than the number of authorized shares.   Outstanding shares are the issued shares that are currently outstanding. After being issued, a corporation may buy back shares that then are no longer outstanding.   Think Of The Number Of Authorized Shares As Your Company’s Share “Limit”  The number of authorized shares is much like a credit limit on a credit card.  Let’s say you have a $5,000 credit limit and your ABC Corporation only has 5,000 shares authorized.  The $5,000 limit is like the number of authorized shares — you cannot spend more than $5,000 credit limit, just like ABC Corporation cannot sell or grant more than 5,000 shares.   Starting with its 5,000 authorized shares, let’s say ABC Corporation issues 2,600 shares. This is like the company spending $2,600 of its $5,000 “credit limit.”  You have $2,400 left to spend in your credit line, and ABC Corporation has 2,400 shares left to issue.  Issuing more shares than there are authorized makes those additional shares voidable.  To issue more shares once you have reached the authorized limit, you need to amend the corporation’s charter, which usually requires approval from the board of directors and at least a majority of the existing stockholders (or whatever approval process the company’s charter or bylaws states).   The stockholders might not be eager to approve of this change because increasing the number of authorized shares allows for the possibility to issue more shares that can dilute the ownership of existing stockholders.   How Many Shares Do Startup Founders Need To Issue?  The commonly accepted standard for new companies is 10 million shares.  When you build a venture-backed startup designed to scale, you will need to issue shares to an increasing number of employees.   Authorizing 10 million shares means it will be unlikely you’d ever need to offer someone a fraction of a share.  A company can grant 10,000 shares to an employee which represents just 0.1% of 10 million shares.  Psychologically, that works much better than giving ten shares which would be 0.1% of 10,000 shares.   Also, the price per share will be lower.  Let’s say two companies are each worth $1 million.  One company has authorized and issued 10 million shares, while another has authorized and issued 1,000 shares.  The first company would have a price per share of 10 cents per share.  The second company would have a price per share of $1,000.  As an investor, it can “feel” better to buy at a lower price.  The quoted examples assume that the number of issued shares is at the maximum number of authorized shares.  Out of a company’s 10 million authorized shares, founders are typically issued anywhere from 5 to 7 million shares.  This practice makes sure that the founders always own a majority of the issued shares even when all 10 million shares have been allocated.   To incentivize employees, startup founders reserve a percentage of the company to issue employees stock options or other equity incentives.  This reserved number of shares is called the “option pool” and is most commonly the number equal to 10 to 20% of the currently issued shares.   The remaining number of authorized shares that are not issued or reserved for issuance is available to investors, usually as preferred stock.   How Do You Calculate The Ownership Percentage Of A Startup’s Shares?  When calculating the percent ownership of a corporation, do not count the authorized shares. Instead, focus on the number of issued shares.  In the example of a startup with 10 million authorized shares, 6 million are issued equally between two founders so that each founder owns 3 million shares, or 50%, of the company.  If the founders wish to have a 10% option pool for employees, 600,000 shares are reserved for issuance as stock options (or other equity incentives).   Please note that stock options give the right to purchase shares of stock but are not actually shares of stock, so a holder of stock options has no ownership in the company until the stock option is exercised.   Summary  Investors are used to seeing 10 million shares, but you can choose any number to authorize.  The key is to have enough shares to issue additional shares to incentivize employees and to raise funds from investors without immediately having to amend your charter every time you wish to issue additional shares.   This article lays out the distinction between authorized and issued shares as well as some strategies related to allocating them, but please note that this post (1) is not provided in the course of and does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from qualified professionals.  LegalMente AI – The One-Stop AI Legal ShopTM Lawyers are expensive. If you’re tired of high legal costs, you should consider using AI to help.  LegalMente AI® uses artificial intelligence to reduce the cost of legal work for small businesses, startups, healthcare, and individuals.  LegalMente’s software uses patent pending RedFlag DetectionTM AI technology to read and analyze common legal contracts with accuracy and speed.
The 83(b) Election- What Startup Founders Need to Know

There’s a critical choice founders must make when making a Section 83(b) election. The 83(b) election is a provision under the Internal Revenue Code that gives an employee or startup founder the option to pay taxes on the total fair market value of restricted stock at the time of granting.  If one waits too long to decide, founders or employees granted company stock could face some profound tax implications.   Let’s start with the basics.  What is Restricted Stock?  While many startup companies give stock options to employees, some grant restricted stock to its founders and certain employees. Restricted Stock is granted to a stockholder but limited in that it cannot be transferred or sold by that stockholder and may even be taken back by the company until certain conditions are met. Once met, the stock is released from the restrictions and said to be “vested.”   If you are granted restricted stock, filing an 83(b) election might save you money on taxes, especially if you think the stock will become more valuable (and hence, result in a higher tax bill).  It’s helpful to know how these elections work and when they may be useful. The steps required to file an 83(b) election are relatively simple.    Should I file an 83(b) election?   After you are granted restricted stock, you have 30 days to send an 83(b) election letter to the IRS to let them know that you want the stock to be taxed on the date it was granted. Otherwise, you will pay taxes on the date the stock vests.  However, 83(b) elections may not be advantageous in every scenario. When deciding whether to file an 83(b) election, consider:     How can I file an 83(b) election?  If you decide to file, you should consult with a tax or legal professional to ensure that you correctly complete the process. To give you an idea of what’s involved, the necessary steps are:  This article is not provided in the course of and does not create or constitute an attorney-client relationship. It is not intended as a solicitation, is not intended to convey or constitute legal advice, and is not a substitute for obtaining legal or tax advice from qualified professionals. LegalMente AI – The One-Stop AI Legal ShopTM Lawyers are expensive. If you’re tired of high legal costs, you should consider using AI to help.  LegalMente AI® uses artificial intelligence to reduce the cost of legal work for small businesses, startups, healthcare, and individuals.  LegalMente’s software uses patent pending RedFlag DetectionTM AI technology to read and analyze common legal contracts with accuracy and speed. Our AI Paralegal, ParaTM, can answer legal questions, analyze multiple file types, and help you form a business.  Our Pre-Drafted Legal Document Templates contain templates for common legal contracts such as NDAs, BAAs, and SAFEs. And LegalMente AI can also help connect you to licensed attorneys. 
How to Form an LLC – Key Steps You Must Know

Choosing the right legal structure is a critical decision for business owners in the US, and one of the most popular options is forming a Limited Liability Company (LLC).    An LLC offers several advantages, including personal liability protection, flexibility in management, and various tax options. Unlike sole proprietorships, an LLC shields personal assets from business debts and legal liabilities.   Additionally, members can choose whether to be taxed as a sole proprietorship, partnership, or corporation, depending on their financial goals.  Types of LLCs Not all LLCs are created equal. There are several types of LLCs to consider, and choosing the right one is crucial for your business structure:   Steps to Form an LLC in the United States  Additional LLC Responsibilities Forming an LLC comes with ongoing responsibilities such as filing annual reports, paying state fees, and maintaining proper records. The costs vary by state, so be sure to check local requirements. For businesses operating in multiple states, “foreign qualification” might be required to do business legally across state lines. Keeping accurate records and consulting with an attorney or legal professional is essential to ensure compliance.  Is an LLC Right for You? Deciding to form an LLC depends on your business goals. If you’re looking to protect your personal assets, offer flexibility in taxation, and simplify management, an LLC might be the perfect fit. However, it’s vital to assess your situation with professional advice to ensure you’re making the right choice for your business. LegalMente AI – The Future of Legal Work Traditional legal services have their place. However, high legal costs and inefficiencies are hard to ignore. Dealing with contract review doesn’t have to drain your wallet. LegalMente AI offers an innovative solution that addresses these challenges head-on. It provides quick, accurate, and cost-effective contract reviews.   Step up to smarter, more affordable legal reviews with LegalMente AI. Sign up for a free user account today and say goodbye to those endless legal bills. LegalMente AI is free to use for everyone so you can start saving money today. 

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