A Crowd SAFE is an investment contract between investors and companies looking to raise capital. Individuals make investments for the chance to earn a return—in the form of equity in the company or a cash payout—if the company is acquired, goes public, or sells all of its assets.
Investors using the Crowd SAFE get a financial stake in the company, but are not immediately holders of equity. Investments are converted to equity if certain “trigger events” occur, such as the company’s acquisition or IPO.
Trigger events are not guaranteed.
The valuation cap specifies the maximum valuation at which the investment converts into equity or shadow shares. This means that investors, when a trigger event occurs, receive equity shares at the valuation cap price—even if the valuation at which the company sells is higher. The higher the valuation of the company at the time of sale, the greater the investor’s return. Investors can also request their cash back if they believe this represents a better return on investment.
If a trigger event occurs, the discount provision gives investors equity shares at a reduced price relative to what others pay at IPO or acquisition. If the Crowd SAFE is converted during an equity financing, the discount will allow investors to receive shadow shares at a discounted price compared to what new investors paid.