Question: With respect to financing documents, what does an early-stage VC need to do at the time of a an Equity Financing (aka Preferred Stock Financing), if said VC invested earlier in a typical SAFE note?
A standard, unaltered Y Combinator SAFE in 2023 contains language such as the following (please review variations published by Y Combinator for exact phrasing):
"In connection with the automatic conversion of this Safe into shares of Standard Preferred Stock or Safe Preferred Stock, the Investor will execute and deliver to the Company all of the transaction documents related to the Equity Financing; provided, that such documents (i) are the same documents to be entered into with the purchasers of Standard Preferred Stock, with appropriate variations for the Safe Preferred Stock if applicable, and (ii) have customary exceptions to any drag-along applicable to the Investor, including (without limitation) limited representations, warranties, liability and indemnification obligations for the Investor."
Answer:
*Typically, during an Equity Financing, the Company (the portfolio company), will retain a law firm, which will be responsible for coordinating/distributing documents and requesting signatures as needed.
**SAFE investors typically sign a subset of the Equity Financing documents.
Generally a VC in similar circumstances will need to:
- Review the Preferred Stock Purchase Agreement and accompanying documents (with the assistance of its own counsel, which is usually recommended) to ensure its SAFE is converting correctly and as intended;
- Sign the final financing documents (or subset thereof) as distributed by the portfolio company's law firm;
- Receive and retain a final, fully executed set of closing documents for the Preferred Stock Financing.
