Continuing on SAFEs, sometimes investors who have signed SAFE Agreements with companies either change their decisions entirely and don’t end up wiring the investment funds for a myriad of reasons or decide to wait for the next round of capital raise. Regardless of the reason, if your company has signed a SAFE Agreement with the investor, the company is liable to the investor under the SAFE Agreement.
In the event of a disagreement over whether the investment was made, a reactive approach could be that the company refutes an investor’s claim by demonstrating through its bank statements that it did not, in fact, receive funds from the investor. However, a better and proactive approach to this could be for the company to send a SAFE Cancellation Agreement expressly canceling the SAFE Agreement signed with the investor earlier.
Proactive Approach and Its Upsides:
- A proactive approach is always preferred because it rules out any possibility of a future dispute or disagreement between the company and the investor.
- There is clarity about the cap table which can be readily shared with future potential investors if requested.
- Such an approach showcases that the company is adhering to good corporate governance practices.
Reactive Approach and Its Downsides:
- Lack of clarity about the investor’s investment may lead to sour relations and dampening of trust between the company and the investor.
- Clearing out confusion and misunderstandings later causes waste of time and resources.
- Unclear cap tables may drive away future investors.
There could be other upsides and downsides depending on circumstances.
What You Should Do
Consider a proactive approach and cancel the SAFE Agreement if the investor did not wire the funds under a particular SAFE.
This entails drafting a simple 1- or 2-page SAFE Cancellation Agreement that explicitly provides that the investor decided to not proceed with the investment. As a result, the investor and the company agree to cancel the SAFE. It would be even better if the original SAFE is attached as an Exhibit to the SAFE Cancellation Agreement.
My Experience
A company had signed three (3) SAFEs with the same investor. Under one of the SAFEs, the investor decided not to invest. That SAFE was for $100,000. The investor held the view that it had wired multiple investment amounts under the multiple SAFEs. Because of lack of time, it took the investor eight (8) months to review its records and finally agree to signing the SAFE Cancellation Agreement with the company. Thankfully, the company’s Series A occurred just after the investor signed the SAFE Cancellation Agreement. Even if the amount in question is small, for a startup every penny counts.
Key Takeaways:
All of the above largely applies even in the case of Convertible Promissory Notes. It is highly recommended that any convertible instruments, such as SAFE Agreements or Convertible Promissory Notes, are canceled right away if the company is not obligated under them. You will never regret being proactive as you will avoid pitfalls in relationships and will have a clean cap table.