SeedLegals English law version of YC SAFE for raising from US investors

SeedFASTs are a fast and easy way to raise from individual investors before a funding round. Investments made by a SeedFAST convert into shares when the company does a funding round, at a valuation to be determined in the funding round.

SeedFASTs are SEIS/EIS compatible too, as long as they are set to convert in no more than six months from date of signing, if there is no new funding round before then.

SeedLegals’ SeedFAST is the de facto standard in the UK. Over 10,000 SeedFASTs have been created by UK startups, raising over £500M.

UK investors are familiar with SeedFASTs – if you’re raising with UK investors, it’s quick and easy to raise before a round with a SeedFAST.

But what if you’re raising from US investors?

US investors are familiar with YC SAFE… but that’s Delaware law, US share class names and other US provisions that don’t work in the UK.

So we made it 1-click simple to create a SeedFAST that’s an English-law version of a YC SAFE, perfectly designed for UK companies raising from US investors.

Keep reading for how to create an English law YC SAFE on SeedLegals, what to watch out for in YC SAFEs, how we adapted it for UK needs, and what to think about when raising from US investors, particularly the problem with foreign exchange rates.

Contents

• How to create an English law YC SAFE
• Raising from US investors is a growing trend
• We say potato, you say tomato
• SeedLegals YC SAFE, modified for English law
• A note on YC Post-Money conversion
• We added a longstop date
• No need for a side letter
• How to create an SEIS/EIS compatible version of YC SAFE
• Raise in pounds or dollars?
• Talk to an expert

How to create an English law YC SAFE

1. Log into SeedLegals
2. Select to create a SeedFAST, just as you normally would
3. Choose your preferred deal terms, just as you normally would
4. Select YC Post-Money SAFE, modified for English law:

It’s as easy as that – you can log in and create yours now.

By the way, we recommend going with the regular SeedFAST option unless your US investor specifically asks for a SAFE, for reasons we explain below.

Raising from US investors is a growing trend

At SeedLegals we’re seeing an increasing number of companies raising from US investors. Many founders now see US investors as the preferred choice for fundraising, particularly for Seed and Series A rounds where they’re targeting funds instead of SEIS/EIS angel investors.

A combination of huge US fund sizes, increased willingness to make large investments and higher valuations common in the US means that after doing the circuit with UK funds and being disappointed by their risk appetite, lowball valuations and a standard response of, ‘We love what you’re doing, come back later’, founders switch focus to the other side of the Atlantic and look to raise from US investors.

At SeedLegals, our goal is to make it as easy as possible to raise investment. You still need to find the investors, we’ll help you sort the rest.

So we’re launching an English law YC SAFE, specifically to make it easier to raise from US investors.

We say potato, you say tomato

A SeedFAST works perfectly no matter where the investor is, it’s always the law of the country your company is in (for example, England) that applies. So if you’re raising from US investors, you can of course create a SeedFAST for them.

But, in the same way that SeedFASTs are the standard in the UK, in the US it’s Y Combinator’s SAFE that’s the standard pre-funding-round investment agreement, the so-called YC Post-Money SAFE. To make it as frictionless as possible for a US investor to invest in your company, offering them a YC SAFE could be the way to go (but it comes with potentially significant dilution disadvantages to you).

But you can’t just download a YC SAFE template, fill in the blanks and sign it. That isn’t going to work in the UK because:

• it’s Delaware law
• it contains various SEC and tax commitments that you definitely don’t want
• it talks about Common Stock, Series Seed Stock and other terminology that just doesn’t apply in the UK, your US investor will be getting Ordinary or Preferred Shares, not Common Stock
• the US legal drafting is almost incomprehensible to any UK (or indeed US!) founder – the vast majority of people signing YC SAFEs have no idea how its post-money cap works
• YC SAFEs don’t have the concept of a longstop date, but in the UK you’re likely to have SEIS/EIS investors as well and they’ll have SeedFASTs with six-month longstop dates, so to avoid problems with some investments converting and others not, you’ll most likely want your US investments to have a longstop date too.

The SeedLegals YC SAFE, modified for English law

To address the points above, we’ve amended the YC SAFE standard agreement.

Our goal is to create an agreement as familiar as possible to a US investor who’s used to the actual YC SAFE template – so we intentionally limited the changes to only those things needed to make it work for English law and UK companies.

We also addressed a key failing of the YC SAFE template which is that with a YC SAFE you only have the option of a Cap or a Discount, but not both. With SeedFASTs you have a much richer set of deal terms, including combinations of Cap and Discount. So on SeedLegals, you can generate an enhanced YC SAFE that gives more flexibility on deal terms.

To make sure your US investor understands it all, we include an optional Cover Letter that explains the deal terms in plain English, something that the YC SAFE fails to do.

And so that your US investor can see at a glance the differences compared to the YC SAFE template, we insert wording at the start of the agreement noting the key differences introduced for English law, addition of a longstop date, and any other changes based on the deal terms you select.

A note on YC Post-Money conversion

Compared to a SeedFAST, a YC SAFE has a significant disadvantage:

• if a YC SAFE converts at the valuation cap, it converts not at the valuation that you had set as the Cap, it converts at that valuation minus the value of that SAFE and the value of all other SAFEs and convertibles.

Example:

• you create a YC post-money SAFE, raising $1M at a $10M cap
• you go on to raise another $2M in SeedFASTs and YC post-money SAFEs
• some time later, you do a funding round at a $12M pre-money valuation
• this YC SAFE will convert at a cap valuation of $10M minus $3M = $7M
• all other YC SAFEs will similarly convert at their agreed cap minus $3M

And that’s the problem: the more you raise in YC SAFEs and other convertibles, the lower the valuation that they all convert at… which can be a huge problem for founders being way more diluted than they expected if they aren’t aware of this and don’t factor it into their funding plans.

We’re not fans of this approach, and our standard SeedFAST doesn’t do this. If you specified that a SeedFAST converts at a £10M cap, then it will convert at that cap, no matter what other amounts were raised in SeedFASTs that are converting in that round.

Which is why we suggest you go with a SeedFAST, including for US investors, unless you know that the investor will be looking for a YC SAFE, or that they’ve specifically asked for YC Post-Money conversion terms.

We added a longstop date

In the UK, it’s standard that advance subscription agreements (SeedFASTs are ASAs) include a longstop date. If the company doesn’t have a funding round before the longstop date, then at that date the investment will convert into shares at the Longstop Valuation, which the company and the investor will have agreed and which forms part of the investment agreement.

The longstop date protects the investor – it avoids a situation where the company takes their money, then goes on to never do a funding round (for example, if the company grows organically from revenue and doesn’t need to raise further investment) in which case, without a longstop date, the investor would never get equity in the company before the sale of the company or the company going into liquidation.

Importantly, for an investment to qualify for SEIS or EIS, HMRC requires a longstop date no more than six months from the date of signing the investment agreement.

The YC SAFE doesn’t have the concept of a longstop date, probably because in the US companies might raise for years using SAFEs which then convert in a monster funding round way in the future.

But in the UK, the pattern is very different. Instead of being used instead of a funding round, SeedFASTs are largely used as bridge finance before a funding round. That, combined with the SEIS/EIS requirements, means that longstop dates are standard in the UK.

A problem arises if you raise with SeedFASTs and/or SAFEs from a mix of UK and US investors, and some have a longstop date and some don’t. Things get messy if you don’t have a funding round before the longstop date: the UK investments will convert, but the US ones won’t. And then when there is a new funding round, the US ones will convert at that time, diluting the UK investors who converted earlier.

This is why we added a longstop date into our English law YC SAFE – to avoid this problem. We’re mentioning this so you know how to explain it to US investors if they ask.

No need for a side letter

In Y Combinator’s desire to create a simple investment agreement, they removed so much that some terms investors commonly look for – such as Most Favoured Nation (‘MFN’) and board observer rights – aren’t included in the SAFE. As a result, investors often ask for a separate Side Letter with those terms, which somewhat defeats the purpose of trying to skim down the agreement.

We avoid the need for that side letter, for the most part by including the common side letter terms within the investment agreement, if you choose to enable them in the deal term questions.

How to create an SEIS/EIS compatible version of YC SAFE

The YC SAFE isn’t SEIS/EIS compatible (no longstop date, provisions for SEIS/EIS-incompatible return of capital). That’s fine for your US investors, they won’t be looking for SEIS or EIS.

But if you have UK investors looking for a YC SAFE-style investment agreement, or you want to use the identical type of investment agreement for your UK and US investors, you’ll be pleased to know that if you set the investment as SEIS or EIS we’ll automatically generate an SEIS/EIS compatible version of a YC SAFE (note that the longstop date must be no more than six months if the investor wants to claim SEIS or EIS).

Because of the YC SAFE’s unfavourable Post-Money Cap provisions, we recommend using the standard SeedFAST version, but the choice is there if you want it.

Raise in pounds or dollars?

If you’re a UK company using a SeedFAST or SAFE to raise from US investors, an obvious question is whether you should raise in GBP or USD.

Your US investor is used to talking round-number dollar investments (‘I’m in for $100K, let’s do it!’), but we suggest that you should, if possible, specify the investment in pounds. Here’s an example showing why:

• you agree an investment of $100K
• at today’s exchange rate that works out as, say, £90K
• the SAFE converts a year from now in a funding round where you’re raising £1M at a £10M valuation (you’re a UK company, with shares denominated in £, so your next round is likely to be priced in £, particularly if there are UK investors in the round)
• a year from now the GBP/USD exchange rate could be very different, let’s say hypothetically that $100K is worth £80K using the exchange rate at the time

So, how many shares does the US investor get?

1. a number based on the exchange rate at the time you signed the investment (if you even remember what it was back then), or
2. a number based on the exchange rate when you complete the funding round next year?

We’ve seen companies that have experienced this exact issue, with the investor getting a significantly different number of shares than they had expected because the USD/GBP exchange rate is very different to what it was a year ago.

To avoid these issues, we suggest that it’s fine to discuss round-number dollar amounts with your investor, but in the SeedFAST or SAFE, the investment amount is specified in pounds, using the exchange rate just before you sign the agreement.

What if the US investor really wants to send $100K rather than £89,465? You can still set the investment amount at £89,465, but use the Additional Items section to specify that the investor will wire $100K, which will be deemed to be £89,465 based on current exchange rate.

Talk to an expert

Got questions about our English law YC SAFE? Book a free chat with one of our funding experts:

Main image adapted from images by flaticon and pikisuperstar on Freepik