[HN Gopher] Carolynn Levy, Inventor of the SAFE
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Carolynn Levy, Inventor of the SAFE
Author : baxtr
Score : 105 points
Date : 2022-11-17 14:19 UTC (1 days ago)
(HTM) web link (meridian.mercury.com)
(TXT) w3m dump (meridian.mercury.com)
| nocoiner wrote:
| I'm lawyer for private companies, though very rarely for VC-
| backed companies, and to my paranoid mind, the SAFE is at the end
| of the day not really much more than a term sheet on a handful of
| key economic terms. Which, in a high trust environment, is just
| fine the vast majority of the time and the reduction in
| transaction costs is almost always worth the trade-off! For
| instance, no one reads the deal documents they've paid hundreds
| of thousands of dollars for (if not more) after they're signed
| ... until there's a commercial disagreement, and then every word,
| and sometimes punctuation marks, can make or break a case, so the
| docs get read VERY closely at that point. (This is an
| exaggeration, but directionally true.)
|
| But statements like the following from TFA (which I enjoyed quite
| a bit and found quite interesting) seem like they obviate the
| protections that are the sole reason for equity investment
| documents to exist:
|
| _It seems to be that, after a certain point, the utility and
| success of the SAFE really is contingent on a founder 's
| worldview -- how much effort they put into tracking dilution, how
| closely they read the document when they sign off on terms, and
| whether they keep their promises to investors, even when they
| don't have to._
|
| If you don't have to keep it, it's not a promise! If the
| fundraising system relies on norms and reputations to enforce
| baseline expectations, you frankly don't need contracts - a
| handshake, an email memorializing key terms and the whisper
| network is enough to keep founders and investors in line. But for
| any kind of reasonable legally enforceable rights and remedies,
| that's gotta be documented - and unfortunately, usually at great
| length and expense.
|
| (Side note: private equity sponsors frequently, though not as
| often as they used to, push back on their counterparties in
| negotiations by telling them "trust us, we're in the reputation
| business - if we screw you, no target/management team/issuer will
| ever take our money again." When the sponsor has to choose
| between its IRR and its reputation, guess which it picks?)
|
| I think the SAFE is a cool instrument. I think it's great for
| start-ups existing in the right cultural setting. But it's less a
| legal innovation than a thoughtful short-form summary of a
| standardized set of commercial terms.
|
| Question to any VC lawyers who happen to see this - have there
| been many SAFEs litigated?
| mrDmrTmrJ wrote:
| So I'm not a lawyer, and I haven't litigated anything, and this
| is not legal advice, but have raised capital (ventures debt,
| safe's, and Series-A) and seen how PE companies work/do
| acquisitions. In thinking about these documents, it's worth
| remembering that for these companies there are basically only
| two outcomes: 1. Do a priced round (Series-A) that converts the
| investment. 2. Or, go bankrupt/run out of money and stop
| operating.
|
| For #1, conversion i.e. Series-A, tend to be done by a small
| number of legal firms that everyone knows, and VC's have their
| own legal council too. While there can be plenty of negotiating
| on terms; I've never heard about conversion being contentious.
| Compared to many other things, these are 'happy events.' Both
| sides need to 'opt-in' to the agreement. And the law-firms and
| VCs have strong incentives to play close to the book.
|
| For #2, bankruptcy's or wind down, there's usually nothing to
| fight over. The firm has no money, and no-one has put value to
| the assets.
|
| This is extremely different from many corporate transactions
| where a) the firm may have a lot of tangible/valuable assets,
| b) the seller is wealthy/sophisticated/has ulterior motives and
| c) the buyer is wealthy/sophisticated/has ulterior motives. So
| there's tons of potential motivation, and reason, to fight over
| things.
|
| So I think both the finite ways SAFE's are used, and the finite
| outcomes/incentives to the counterparties significantly reduce
| the 'reasons' for litigation - compared to the vast majority of
| corporate agreements/contracts/legal proceedings.
| thesausageking wrote:
| There is a third outcome which is a problem for SAFEs: the
| company has moderate-but-not-amazing growth and never raises
| an equity round. The founders are able to just keep growing
| it, paying themselves good salaries and eventually
| dividending out profits to themselves. Because SAFEs have no
| maturity date and have no rights to dividends, the investors
| get nothing and are basically stuck.
| beambot wrote:
| Such "zombie" companies are effectively a write-off for
| venture investors given the power law dynamic of their
| funds. Usually the SAFEs will be negotiated away (modest
| payout or written down to zero) as the 10-12 year lifetime
| of the fund draws to a close.
|
| Most parties are good about coming to an amicable
| conclusion since a bitter dispute would irreparably harm
| both parties' reputation in future endeavors.
| Terretta wrote:
| irreparably is overused
|
| on the contrary, almost nobody remembers anything where
| they weren't a main character
| thesausageking wrote:
| I'm not talking about zombies. These are profitable,
| growing companies. Just not venture scale.
|
| Often you can work something out with founders, but the
| fact that the SAFE doesn't have anything to say about
| these situations is a bug.
| gumby wrote:
| > For instance, no one reads the deal documents they've paid
| hundreds of thousands of dollars for (if not more) after
| they're signed
|
| The financing docs don't costs hundreds of kilobucks, more like
| an outrageous 20K or so (with the investors' lawyers' bill
| coming out of proceeds -- scandalous, as that's what the 2%
| management fee is for!). An acquisition can cost a lot more.
|
| And actually I do always read the deal book. Because they are
| huge piles of cut/paste & patch, they are inevitably full of
| inconsistencies, overlooked deviations from the TS etc. None of
| which matters to get the deal signed, but as you say:
| potentially fatal down the road if a situation comes up when
| you actually need to consult it.
|
| Also notes were never a big deal to put in place; I used them
| on a deal just before COVID and it simplified a lot of things.
| SAFES are handy too, but I didn't like the change to post-money
| which I find much less founder friendly.
| nivertech wrote:
| _> The financing docs don't costs hundreds of kilobucks, more
| like an outrageous 20K or so (with the investors' lawyers'
| bill coming out of proceeds -- scandalous, as that's what the
| 2% management fee is for!). An acquisition can cost a lot
| more._
|
| for some debt financing structures the legal cost can be up
| to $500K:
|
| Launching a Financial Product: How to Choose the Right
| Funding Structure
|
| https://a16z.com/2022/10/10/launching-a-financial-product-
| ho...
| gumby wrote:
| Well, for some specialized bankruptcy debt according to
| that page. But I have done venture debt (e.g. from someone
| like WTI or SVB) and never had legal bills as high as they
| talk about there. Then again they talk about $75MM in debt;
| the most debt I've taken on was about $25MM and it has
| always been cheaper than any equity financing.
|
| In general I don't like to get creative on this stuff -- I
| leave that to the actual execution of the business.
| nocoiner wrote:
| > The financing docs don't costs hundreds of kilobucks, more
| like an outrageous 20K or so (with the investors' lawyers'
| bill coming out of proceeds -- scandalous, as that's what the
| 2% management fee is for!). An acquisition can cost a lot
| more.
|
| One distinction I should have mentioned - the vast majority
| of my deals use LLCs to raise capital. That increases the
| number of points that need to be negotiated by probably two
| orders of magnitude compared to an investment in a Delaware
| corp. Way more efficient to rely on the corporate code,
| fiduciary duties and non-waivable duties of care than to re-
| invent virtually every component of economics, governance and
| control on every deal. Yet here I am...
|
| But of course, another part of the reason the bill is so high
| is because we're not just copying and pasting disparate
| provisions - we're making sure the doc matches up with the
| commercial deal. But yeah, you could half-ass an LLC
| agreement in an afternoon, and it'd be good enough 90% of the
| time probably.
| ahaseeb wrote:
| It's still expensive to raise Series A. Like why isn't
| there a very standard document that can significantly
| reduce the cost of financing
| dotBen wrote:
| There are. Always ask for counsel to use NVCA docs.
|
| It's expensive because partner time for this kind of
| transaction is $1200-2000/hr and their juniors will be a
| fair %age of that rate too.
| gumby wrote:
| You shouldn't need a partner for this kind of deal. In
| fact, startups should never have to pay for partner time
| and I never have at a company with less than about $50MM
| in revenue (even with firms like Gunder, Cooley, Wilmer,
| MoFo etc).
| breck wrote:
| Really interesting. I did not know the origins. I do know the
| Levys (they used to have the early classes over for BBQs and it
| was awesome) and one thing I didn't pay attention to until now is
| how I would just always send crazy ideas their way and they would
| humor them and explain the legal issues around them. Now it all
| makes sense--Clevy was breaking new ground in the legal world (if
| there's one thing I never paid any attention to until recently
| its the legal world). Thanks for putting this history together
| Mercury!
| divbzero wrote:
| I appreciate the conscious effort to be concise:
|
| _"Writing a short legal document is actually quite hard. It's a
| cliche -- the simpler it is, the harder it is to do, and us
| lawyers are so used to writing for each other and not thinking
| about how short things should be."_ -- Carolynn Levy
|
| _"The idea itself wasn 't the innovation. The concept was
| similar to the convertible note. The innovation was writing such
| a short document without any of the complex pieces."_ -- Kirsty
| Nathoo
| halpmeh wrote:
| In general, I find it crazy that we allow legal documents to be
| so complex. And not just complex, but comped to the point of
| being less clear than something stated in simple, plain
| language.
|
| Legal matters, both civil and criminal, are so of the most
| important things in a person's life. How do we allow language
| that is only decipherable by "experts"? Even if you understand
| the language, the "correct" interpretation of that language is
| governed by decades and centuries of inscrutable case law. To
| me, this is a tragedy. Laws and contracts should be made in
| simple language understood by a majority of the populace.
| People have a right the understand the rules that govern them.
| matthewmcg wrote:
| In my experience there are three sources of complexity in
| contracts:
|
| (1) inherent complexity in the subject of the contract
|
| (2) a complex form being applied to a simple subject
|
| (3) bad drafting
|
| The first is sometimes unavoidable. For example, if you're
| drafting a loan document that has an interest rate based on a
| benchmark, it's probably not enough to reference that
| benchmark. You also want to include some provisions that will
| specify what happens if the benchmark ceases to be published.
| This kind of fulsome treatment makes contracts longer and
| more complex.
|
| The second is a a result of the way most lawyers work. It's
| far quicker (and therefore cheaper for the client, at least
| in the short term) to take an existing form and make changes
| to adapt it to a new situation than it is to create a bespoke
| contract. This reuse of forms propagates archaic language,
| needless "boilerplate" clauses, and the like. Many commonly
| encountered provisions are akin to junk DNA. They're included
| when the template is replicated but long ago ceased to have
| any function. Example: counterparts clauses or clauses
| "allowing" electronic signatures. [1]
|
| To me, the solution to this issue is to build contracts
| differently. Instead of starting with a recent precedent
| document and choosing "save as," we need to assemble them by
| carefully choosing well-drafted clauses from a library--think
| of a recipe for a convertible note that has "#include
| preemptive-rights" or something like that.
|
| Finally, drafting contracts well is a very specific skill.
| It's not a case of using the right "magic words." Rather,
| it's being able to describe the parties' bargain clearly and
| precisely. This isn't taught in most law schools, and most
| lawyers never bother to learn it systematically. Again,
| they're rushing to adapt existing forms that a colleague has
| blessed, and very shy about creating something new.
|
| I think most practitioners are aware of these factors but
| feel they can't really change them due to being caught in an
| hourly billing treadmill. In the article, Carolyn Levy says
| she couldn't' really tackle this problem until she went in
| house. That has been true for me as well.
|
| [1] https://www.adamsdrafting.com/counterparts-an-example-of-
| cat...
| cebert wrote:
| I immediately assumed this article was about the Scaled Agile
| Framework (SAFe) and was pleasantly surprised.
| Traubenfuchs wrote:
| I already planned how I would balance hate speech and
| censorship when writing a response about how Carolynn Levy
| should be considered public enemy number one of developers and
| the murderer of real agile development.
| doctor_eval wrote:
| It's funny because it's almost the opposite. "Simple Agreement
| for Future Equity", an intentionally abbreviated legal document
| to make deals easier and, dare I say it, more agile. As opposed
| to SAFe, a methodology written by consultants, for consultants.
| jnsaff2 wrote:
| Yea, I thought so as well and was immediately terrified about
| their safety.
| [deleted]
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