One of the biggest hurdles so many startups face is funding. In many cases, the funding has to start early to introduce their products or services to the market. This means taking expensive loans or dipping into personal savings, which can cause additional stress.
On the other hand, with a great business plan, a startup owner can find investors among those who are more likely to believe in their vision – family and friends. This is not an unusual process, as it can be pretty challenging to find investors willing to participate at the beginning.
A Friends and Family Simple Agreement of Future Equity or F&F SAFE is usually required to get through the first few months, including hiring employees, renting space, or buying resources.
The F&F SAFE agreement is essentially an investment tool or a financing instrument. It has existed as an option since 2013 and has become a popular solution for funding over the years.
The goal of any SAGE note is to assure the investor they'll get the chance to purchase equity at a preferential price when the company issues preferred stock. Unlike convertible notes, SAFEs are not a debt instrument and don't have an interest.
They also don't contain a maturity date, as the investors are not guaranteed equity. There are many benefits to using SAFE agreements when asking for funds from family and friends for startups.
It's a relatively simple document that doesn't require a great deal of negotiation. Plus, it leaves the startup in complete control.
Depending on your state, a Friends and Family Simple Agreement for Future Equity (SAFE) may also be known as:
Anyone with a great business idea but insufficient funding can use the Friends and Family Simple Agreement for Future Equity. As SAFE's don't require an initial valuation, it can be challenging to find even angel investors.
But if you have family members and friends interested in your project, they can provide a type of pre-seed investment to get the business off the ground.
Create your own documents by answering our easy-to-understand questionnaires to get exactly what you need out of your Friends and Family Simple Agreement for Future Equity (SAFE).
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The F&F SAFE is well-known for its flexibility and simplicity. It's essential to keep all the terms of the agreement fair and transparent – and in writing. You can transfer everything that was agreed upon orally to the Family and Friends Simple Agreement for Future Equity.
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Both parties involved in the Family and Friends Simple Agreement for Future Equity should ensure the terms are fair and clear to everyone.
Upon review, the owner of the company and the investor sign the agreement in the presence of a witness. Notarization is not required but an option for anyone wanting to add another layer of validity to the contract.
After the F&F SAFE is signed, the investor releases the funds to the company per the terms of the agreement.
The recipient of the funds must utilize them in the way it was stipulated in the contract. Both parties should have a copy of the agreement for archival purposes.
The "family round" and "angel round" are early-stage seed financing tools for startup companies. The only difference is in the type of investor.
An angel investor is typically one person or a group of wealthy people who want to invest in the early stages of startups. They are usually very knowledgeable about this type of financing and risk-averse in terms of how much money they can lose.
On the other hand, family and friends usually can offer smaller investments and might not know this type of investing.
In the early stage of the company, placing realistic valuation can be pretty tricky. There usually isn't any revenue to report; thus, it's difficult to see what several years in the future will look like.
However, if a family member or a friend wants to see a valuation before they invest, some agencies provide the service of pre-seed valuation.
That entirely depends on the situation. Usually, these agreements don't require legal advice, especially if the investment amount isn't too significant.
But if a friend or a family member decides to invest in your startup generously, they might require legal services to create the SAFE.
Asking money from friends and family for your startup idea can be tricky and awkward. First, you need to build a strong business plan and know precisely how much money you need.
Then, it's essential to ease people into the idea through relationship building and making a solid pitch for your business idea. Finally, don't forget to keep excellent records of all financial agreements to make future investments much more manageable.
In theory, they can, but that's not considered a fair practice. Not only that, depending on the terms of the agreement, it might be something quite challenging to do.
Every SAFE is different, so it needs to be assessed case by case. Typically, if SAFEs are amended, it's for the investor's benefit and not the other way around.
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