Stocks Attorney Cincinnati

Types of Investment Vehicles

You will find many investment vehicles that can help you secure financing for your startup, but the three that are most common are:

Simple Agreement for Future Equity (SAFE)

A Simple Agreement for Future Equity (SAFE) is a form of seed-stage financing, and it is known for being a lower-cost option than convertible debt. Documents are nearly standardized and just a few pages long, so they’re fast to draft and relatively low cost from a legal perspective. Startups and investors also like using SAFEs for these earlier rounds because they avoid having to put a valuation on the company. You’ll find SAFEs being used most frequently for rounds of less than $1 million, although in some cases, SAFEs are used in larger financings.

SAFEs are one of the types of investment vehicles that don’t require:

• Interest rates
• Specific term

SAFEs convert based on the following triggers:

• Future fundraising rounds
• An exit, such as an IPO or an acquisition of the company

SAFEs are not equity in the company, at least not initially. Rather, a SAFE grants the investor the right to get equity in the future, when one of the triggers occurs. The SAFE investor has no rights as a shareholder until the SAFE converts.

Depending on the terms, the SAFE may convert based on a valuation cap or at a discount to the price of preferred stock issued in future financing. If there is a valuation cap, then the SAFE converts at that valuation number, rather than the valuation set in the future financing. For example, if the valuation cap is $3 million, and you do a preferred stock financing at a pre-money valuation of $8 million, the SAFE will convert at a $3 million valuation. This gives the SAFE investor more shares, as an incentive for investing at an early, riskier stage. If the SAFE converts at a straight discount, that discount is typically 20%.

While there are “standard” SAFE templates available online, founders should be careful about using those without input from legal counsel. The post-money SAFE from Y Combinator, in particular, contains provisions that are extremely dilutive and unfair to founders and should not be used without modification.

Navigating these options can be complex, and seeking the support of a qualified stocks lawyer can help ensure your agreement aligns with both your business goals and investor expectations. By understanding the intricate details of SAFE agreements, you safeguard your startup's future and fiscal health.

Convertible Notes

You may notice an overlap in convertible notes and SAFEs because they both convert to equity in the future, but the two are very different. In particular, a convertible note is considered debt, so it comes with:

• Interest rates
• Maturity date

Upon conversion, the note will convert at a discount or based on a valuation cap, much in the same way as SAFEs. Interest is typically accrued and then converted into equity when the note converts. So, if the note doesn’t convert for a long time, it is a benefit to the investor by increasing the number of shares the investor will get.

Because convertible notes are loans, they do harm the startup’s balance sheet.

If the startup reaches the maturity date before the note converts, the startup will either need to negotiate an extension of the maturity date or find a way to repay the note.

Over the past few years, as investors outside of Silicon Valley have become more comfortable with SAFEs, convertible notes have been used far less frequently.

Employing convertible notes demands a detailed comprehension of debt management and equity transition strategies. Due to their complexity and the ramifications on future equity, consulting with a stock lawyer in Cincinnati can ensure that your strategy not only supports current financial needs but also aligns with long-term growth visions.

Preferred Stock

If you need to raise $1 million or more, preferred stock is an attractive option. Legal fees are often higher than the other options on our list. Investors receive greater rights with preferred stock, so it’s important to work closely with your stocks attorney to negotiate what the terms of the financing will be.

Not sure what types of investment vehicles are in your startup’s best interest, or want legal help to make sure that the agreement is in your best interest?

Kinetic Law can help.

We’ll draft agreements for financing and funding your startup to give you peace of mind that your business’s best interests are put first.

Negotiating preferred stock deals requires a nuanced understanding of financial intricacies and strategic objectives. By partnering with a stocks lawyer conversant with Cincinnati’s regulatory environment, entrepreneurs can ensure favorable terms that align with both immediate financial needs and long-term business objectives. This proactive approach not only deepens investor relationships but also fortifies the company’s market position, nurturing sustainable growth.

Trust our experienced stocks lawyer from Kinetic Law to address your legal concerns. Act quickly by calling (513) 450-9010 or submitting an online form to reserve your consultation.

What is the Best Investment Vehicle?

Raising capital can be achieved using multiple investment vehicles, and the appropriate option for you depends on your unique situation. Entrepreneurs should consult with a professional who understands the ins and outs of each option, but the cases when the three vehicles above are ideal include:

SAFEs

A SAFE is often ideal when you need less than $1 million in financing, and when putting a valuation on the company is very difficult. You don’t have to pay interest rates—a major perk—but they do convert to equity in the future.

You will need to be cautious to avoid diluting your equity in the business too much as a founder.

If too much equity dilution occurs, you can lose control over the company that you helped form.

Convertible Notes

When a SAFE is not ideal, a convertible note might be a good option. Convertible notes work best for raising less than $1 million and also come with a future conversion to equity.

You can close funding for relatively low fees, but there are a few downsides:

• Notes are debt
• Interest will accrue
• A maturity date exists

If the note reaches maturity, you’ll need to either repay the note with interest or negotiate with investors to extend the note.

Considering the market's dynamic nature and varying investor preferences in Cincinnati, collaborating with a knowledgeable stocks attorney can be instrumental in navigating these waters effectively. They can provide valuable insights into current market conditions and guide you in structuring deals that appeal to your specific investor profile while safeguarding your business interests.

Secure legal assistance quickly by connecting with an stocks attorney in Cincinnati. Call (513) 450-9010 or fill out our online form to move forward.