Putting money in startup businesses used to be the exclusive privilege of the wealthy and well connected. Now, anyone can invest in a startup with as little as $100. I think this is great and am surprised as to how few people know about it, or take advantage.
I like to invest early in new companies in the hopes that they hit it big one day. The common dream – and the occasional reality – of investing in a unicorn, a future Fortune 500 company, and cashing out. I invest in building Fund Wisdom and have begun a small angel investing portfolio. I want to build something great and help others that have these same aspirations. How do we get access to those that are at the stage of still working in an unheated garage under flickering fluorescent lights?
I put a few hundred dollars in a company, Arc, through Wefunder back in June 2021. They had built a community and academy that educates computer programmers. They were building an HR based business for aiding people in hiring professionals that were going through their programs. Pretty cool, huh? Well I thought so.
I can anticipate your reaction:
- Had you used the company’s services?
- No, but I like the company’s mission, and had heard good things from programmer friends.
- What portion of the company did you buy?
- I did not know the exact percentage.
- Do you know the owner of the company?
- No. I never met him or any of the founders or team.
- Then how did you get him your money?
- Through Wefunder and via a structure called a SAFE.
What is a SAFE
SAFE stands for Simple Agreement for Future Equity. It is somewhere between an equity and debt security and marks the evolution of angel investing. The key word is “future.” Getting a VC to put a value on a company involves substantial paperwork and fees, not to mention time. A SAFE allows the founder of a startup to raise funds quickly and simply, delaying the official valuation process.
After raising money from family and friends startups, before SAFEs, founders would typically raise money through a priced round offering equity notes. With SAFEs, founders can reach a broad audience of potential angel investors, or people who want to support small businesses that matter to them. Maybe that’s a new tea café in the neighborhood. Maybe it’s a fledgling clothing designer, a yoga studio, or a business that aligns with the investor’s values.
Am I able to call myself an angel investor? It doesn't feel that way yet. You can do the same and find startups on Internet platforms such as WeFunder and Republic. You’ll learn details about the various companies and how much their founders want to raise from investors. For you and me, it just means reading about the business, choosing one or more, deciding how much to invest, sending off our money . . . and waiting.
What are we waiting for? Ideally, the startup will grow large enough so that one day it will turn to venture capitalists to determine the value of the company. Once that price is established, we’ll know how much our “future equity” from the SAFE is really worth. Yes, this could take a while. In fact, it might never occur.
SAFEs are all-or-nothing prospects. I can’t back out of my investment in the coding academy. If it prospers, I should get a return on my money. But I might never see that money again. In the meantime, I get the satisfaction of helping to support a small business that can make a meaningful difference in other people’s lives. In a way, having more good coders in the world enhances my life, too – just like the new café that makes my neighborhood a little more pleasant when I go out for a walk.
Ready to invest in a SAFE? Check out these investing platforms
Have you already invested in a SAFE? Leave a comment and let me know how it went.