Investing in a start-up through crowdfunding may seem exciting, but when investing in the early stages of a new venture you need to educate yourself about the risks. You can be exposed to risks that may not be as common with investments in publicly listed companies, such as the increased speculative risk in connection with whether the venture succeeds at all as well as the increased illiquidity associated with a company not listed on a stock exchange. Our investor bulletins (https://investor.gov/additional-resources/news-alerts/alerts-bulletins) about crowdfunding are must-reads for anyone interested in learning more about the space, including the risks involved.

When learning about crowdfunding, you should understand a new type of security called a SAFE (simple agreement for future equity) that is being offered as part of some crowdfunding offerings. A SAFE is an agreement between you, the investor, and the company, in which the company promises to give you a future equity stake based on the amount you invested. It also involves some kind of a triggering event that must take place in order for you to get your future equity stake.

The most important thing to know about SAFEs is that they are not equity. They are very different from the common stock that you typically buy and sell when investing in a publicly listed company. Common stock gives you an immediate equity stake, while a SAFE promises a future stake if it gets triggered.

You should understand what triggers the conversion of the SAFE—maybe the company is being acquired by or merged with another company. Or, it may involve the company’s initial public offering or another round of financing. But hold on, you should be aware that a SAFE might never be triggered and might never convert into equity. Depending on the actual terms of the trigger, that can happen if the company you invested in makes enough money that it never again needs to raise capital or if the company isn’t acquired by another company. Plus, if the company raises money by selling more SAFEs, common stock or convertible notes, or if it gets a conventional bank loan, the SAFE might not convert, despite the company raising more capital. This means that you may never get a return on your investment or even your original investment back, leaving you with nothing.

There are many moving parts of a SAFE. Be sure to understand how the amount you invested gets converted to equity. You should also ask about any repurchase rights, whether there is a provision that allows the company to buy back your future right to equity and if you have any say in that regard or its price. Not every venture remains solvent, so you should know what happens to your SAFE and the money you invested if the company ends up dissolving. Furthermore, since SAFEs don’t represent current equity stakes in the company and don’t have voting rights similar to common stock, make sure you ask if there are instances where you can have a voice on matters. As you can see, despite its name, a SAFE may not be simple or safe, and they can all be different. So, it’s important to know the terms being offered in advance.

SAFEs were first developed in Silicon Valley as a way for venture capitalists to invest quickly in a hot start-up without burdening it with the more labored negotiations that an equity offering may entail. Keep in mind that for the venture capital investor, it was often more important to get the investment opportunity with the start-up than it was to protect the small investment represented by the SAFE. While this may or may not be the case with the crowdfunding investment opportunity you are exploring, it’s important to know the facts about this type of security before you invest.

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