Startups in the sports sector face unique challenges when raising capital. Whether it’s sports technology, media, or apparel, securing funding is crucial for growth. One increasingly popular method of funding is the SAFE (Simple Agreement for Future Equity).
Introduced by Y Combinator in 2013, SAFEs have transformed the way startups across industries, including sports, raise capital. But what exactly are SAFEs, and how do they benefit sports startups? Let’s explore the key concepts and examine how SAFEs apply specifically to the sports industry.
What Are SAFEs?
A SAFE is an agreement where a startup receives funding in exchange for the right to provide equity at a future date. Unlike traditional equity deals, SAFEs don’t grant investors ownership immediately. Instead, the investment converts into shares during a specified event, such as an equity financing round.
For sports startups, this model is appealing due to its simplicity and speed, especially when compared to more complex funding instruments like convertible notes. As a result, sports companies looking to scale quickly can use SAFEs to attract investors without complicating the process.
Pre-Money vs Post-Money SAFEs in Sports Startups
When it comes to choosing between pre-money and post-money SAFEs, startups in the sports sector need to consider the impact on ownership and valuation. The sports industry can be volatile, with seasons, sponsorships, and events affecting financial stability. Therefore, understanding these key differences is crucial.
- Pre-Money SAFE: Pre-money SAFEs calculate ownership percentages before considering funds raised through SAFEs or other convertible securities. This approach can lead to uncertainty about dilution, especially when multiple rounds of funding occur. For sports startups, this means that the actual percentage of the company sold can vary depending on factors like additional SAFE investments and adjustments to the option pool.
- Post-Money SAFE: In contrast, post-money SAFEs include all SAFEs in the calculation of ownership. This method provides more clarity, allowing both founders and investors to predict dilution accurately. For example, if a sports technology startup raises $1 million with a $6 million post-money valuation, the investor will own 16.6% of the company ($1 million / $6 million).
Why Post-Money SAFEs Are Ideal for Sports Startups
Transparency is crucial for sports startups, where growth can often be unpredictable. Post-money SAFEs have gained popularity in the sports sector because they offer clarity about ownership and dilution. By accounting for all SAFEs in the ownership calculation, these agreements allow founders to plan more effectively, which is particularly valuable in high-growth industries like sports.
For sports startups, post-money SAFEs help avoid unexpected dilution, which could otherwise impact control over the business. This clarity also simplifies investor discussions, as everyone has a clear understanding of the company’s valuation and potential.
Tailored SAFEs for the Sports Industry
In addition to the standard pre-money and post-money SAFEs, sports startups can explore several variations designed to meet specific needs:
- Discount-Only SAFE: This option provides a discount on future share prices, making it ideal for sports startups that anticipate rapid growth. Investors can benefit from a lower price when the company raises additional capital.
- Valuation Cap-Only SAFE: This type sets a maximum valuation for future pricing, which can protect investors from excessive valuation hikes. Sports media companies, for example, can use this to set limits on their future valuations while attracting early-stage funding.
- Most Favoured Nation (MFN) SAFE: With an MFN clause, investors can adopt the better terms offered to later SAFE investors. This is particularly useful for sports startups that anticipate future funding rounds with better terms.
Preparing for SAFE Financing in the Sports Sector
Preparation is essential to ensure a smooth SAFE financing process. Here are key steps sports startups should follow to prepare effectively:
- Organise Documents: Assemble a data room with corporate documents, including sponsorship agreements, intellectual property rights, and other materials relevant to investors in the sports sector.
- Define Fundraising Goals: Determine how much capital is needed and how long it will last. For sports startups, it’s crucial to align fundraising goals with specific milestones, such as product launches or marketing campaigns.
- Create a Pitch Deck: Develop a compelling pitch deck that highlights your vision, market opportunity, and financials. Sports startups should emphasise their unique value proposition and how they plan to succeed in a competitive market.
- Consult Legal Experts: Work with a lawyer who understands the legal nuances of the sports industry. A legal expert can help draft SAFE agreements that comply with industry standards and protect your interests.
- Plan for Dilution: Carefully assess how the investment will affect your ownership structure. For sports startups, this is especially important when planning for future funding rounds or scaling operations.
Are SAFEs Right for Your Sports Startup?
While SAFEs offer simplicity and speed, they aren’t the right choice for every startup. Some investors may prefer priced rounds, which provide additional rights such as board seats or veto powers. Moreover, SAFEs carry the risk that they may never convert into equity if the startup doesn’t raise another round or get acquired.
However, for sports startups focused on rapid growth and scaling, SAFEs can be a valuable tool for securing funding without complicating the process.
Final Thoughts
SAFEs have revolutionised the fundraising process by offering startups a straightforward way to secure capital. For sports startups, understanding the difference between pre-money and post-money SAFEs, and leveraging tailored variations, can help founders make informed decisions. With the right preparation and legal guidance, sports startups can use SAFEs effectively to fund their growth and succeed in a competitive industry.
At 360 Business Law, Jordan Denning, the Regional Director of the US, brings valuable expertise to help sports startups expand into the US market. With a deep understanding of intellectual property, corporate law, and compliance, Jordan and our team can guide your sports business through the complexities of US market entry. Tap into our global resources, with over 650 lawyers across the US and internationally, and benefit from our cost-effective and flexible fee structures. Let us help you establish a strong presence in the US market with tailored legal solutions designed for the unique challenges of sports startups