A founder thinks about pivoting the company outside crypto.
The early SAFE investor is disappointed.
The investor does not want to force the founder to work on a business he does not want to build. It will not lead to a successful outcome for either side. But the investor is willing to put pressure on the founder and ask him to close the business and return the remaining funds to the investor.
What can the investor do? Does the fact that he invested through a SAFE put him in an inferior position compared to if he had invested in an equity round?
Let's examine this:
The founder believes that because the investor is not a shareholder, but SAFE holder, he legally has no rights over this decision.
As mentioned in the instrument post, SAFE holders are not shareholders: they have a contract that entitles them to receive shares in the future.
That means that as long as they hold the SAFE, not shares, they do not enjoy the protections to which a shareholder is entitled.
Shareholder protection
Shareholder status comes with some very real powers in this context:
(1) Board election
Shareholders have the right to elect the board of directors. The company's most strategic decisions are made at the board level. When a company wants to issue new shares to investors, replace the CEO, or, in most cases, make a pivot, those decisions are made by the board.
Even though, after the early-stage round, the majority of the shares are held by the founders, who de facto control the board, investors usually receive Preferred Shares in the priced round or after a SAFE conversion. These usually come with “protective provisions”, including veto rights over major company decisions such as changing the business of the company, entering a new line of business or exiting current line of business, which is what happens in a pivot.
(2) Minority rights
Shareholders have minority protections that apply when the majority is not acting fairly. If a pivot is conflicted, abusive, or clearly detrimental to minority holders, they may seek legal remedies.
(3) Fiduciary duties
The board owes fiduciary duties to the company and its shareholders. If a pivot is irrational, conflicted, or benefits only part of the shareholder base, this can give rise to fiduciary duty claims.
SAFE holders
SAFE holders have almost none of the above protections. They have a contract. That contract is governed by contract law.
As long as there is no contractual obligation in the SAFE that restricts a pivot, the SAFE holder cannot stop the company from pivoting.
Is a SAFE investor giving up control?
In practice, yes. The basic version of a SAFE has almost no control rights.
You can read the agreement yourself. There is nothing that gives the investor control over the company.
That said, in reality, it is very common in early stage deals for lead investors to ask for additional control over major decisions. This can come in the form of veto rights and sometimes a board seat.
Not every investor asks for this. Usually, the lead investor, the one putting in the largest check, asks for these rights, while the rest rely on that investor.
Unlike equity rounds, investors must explicitly negotiate for these options. They do not automatically receive them by holding the shares issued in the equity round.
🏦 The VC perspective
VCs are generally comfortable with SAFEs, which have become standard both generally and in crypto.
Most SAFE rounds with VC participation include added provisions that increase governance and control, typically through veto rights and board representation.
Some investors back founders only if they build in a specific sector. If you are a crypto VC and hope your portfolio company will not pivot outside crypto, you need to make sure this is covered in the SAFE. Otherwise, you may end up in a situation where the founders can freely pivot away, and most of your portfolio becomes unrelated to crypto.
In practice, having a veto over a pivot would not mean founders would be forced to build something they don’t want to build. More often, it gives investors leverage to push for winding down the company, returning remaining funds, or selling their holdings.
🧑💻 The Founder perspective
Founders like SAFEs because they are fast and straightforward to close. Giving VCs board seats and control is great as long as you have good investors. Allowing your investor to get more control can be extremely valuable: they can bring networks and experience that can significantly help the company.
Giving investors control and a board seat also means they are closer to the company and expected to act in its best interest. If they don’t, they may be legally exposed.
