Does my board need to approve a SAFE or convertible note round?
FundraisingGovernance
A SAFE and a convertible note both promise to issue shares later, and under corporate law the board of directors is the body that authorizes a company to issue shares or rights to them. So the board approves the round before the first instrument is signed. For a corporation that approval usually takes the form of a unanimous written consent, which the directors sign instead of holding a meeting. An LLC with a board of managers does the same under its operating agreement.
What the consent says
- The form of instrument the company will use, attached as an exhibit
- An aggregate amount the company may raise under it, which is the ceiling for the whole round
- Authority for the officers to sign each instrument and take the money in over one or more closings
- A resolution to rely on the private-placement exemption from securities registration and to make any required filings
Why one consent for the whole round
Investors rarely all sign on the same day. Approving the round once, up to an aggregate amount, means the officers can close each investor under that ceiling without going back to the board for every check. If the round outgrows the ceiling, the board signs a short consent raising it. A SAFE or note signed with no approval behind it is one of the first things a lead investor's counsel will flag in diligence for your priced round, and fixing it afterwards means a ratification the board should never have needed.
Arabella's library carries the board approval of a SAFE round and the board approvals of a convertible note round for a corporation and for an LLC, each with a questionnaire.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.