Is it okay to sign a SAFE note first and then let the funds get wired? We’re working with an investor who wants to sign first and then do the transfer over 2 months. If the investor doesn’t follow through, what would happen then?

Q: Is it okay to sign a SAFE note first and then let the funds get wired? We’re working with an investor who wants to sign first and then do the transfer over 2 months. If the investor doesn’t follow through, what would happen then?

If you can ever avoid it — don’t work with investors with nonstandard terms.

Take a lower valuation, even “worse terms”, than … nonstandard terms.

Especially:

  • Sign now, wire money much later. Professional investors are in the business of deploying capital. If they aren’t ready to deploy now … then the money isn’t coming. At least, not all of it.
  • Tranches, i.e. some money now (50%), 50% later. There are times when this makes sense, but usually, it puts you at a lot of risk the second tranche doesn’t come … and forecloses other avenues and investors to get that additional capital from.
  • Lots of complicated covenants. If an early-stage investor wants to put a page forward of complex requirements on how you use that capital, that’s a flag.
  • A long post-term sheet diligence period. This can make sense when you acquire a company for $300m. It doesn’t make any sense when investing in a venture round. If you can’t get the diligence done in 2 weeks, something is off.
  • Long lock-ups and exclusive periods. Investors will debate what sort of “no-shop”, if any, makes sense post-term sheet. But any no-shop should be simple and short. A 30+ day no-shop is usually a flag.

If you’re not sure it makes sense, it probably doesn’t. Ask your attorneys. They’ve done a lot of these.

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Published on February 17, 2020

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