
Ask HN: SAFEs and Non-Cash Compensation - Zigurd
To give a discount on consulting work to a founder I&#x27;m working for, is a SAFE or similar contract a good way to take non-cash compensation when the business is too early-stage to have a valuation? Alternatives?
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davismwfl
My advice is just don't do this, the chances of getting any return are slim at
best. If it is a friend and you are wanting to help him/her out but trying to
get some upside that's different. With the friend in mind, just go into it
saying I'll never see any money but I want to help so I am going to do it
anyway. But if this is a stranger and they want you to work for stock, just
don't do it. This is how devs get taken advantage of so easily and so often.

If you still go through with it, have an attorney create/review any agreement
to prevent tax and legal problems for you, stock grants can be taxable
immediately to you, and restricted stock will likely never be worth anything
to you. The "best" way to do this is not to take ownership (unless you are
going to be a founder or paid employee and you get grants), and instead to
invoice the company and hold the debt contractually for invoiced services. You
can finance your work for them this way but the moment you take stock things
become a pain in the ass, and your chances of getting paid will be even less
then doing invoice debt. Also, the stock they grant you will be so diluted and
after preferences etc you'll never see a dime, unless you force non-diluting
and take a preference yourself but then investors might be hard on the founder
for raising money which again, means you won't get paid. Also, don't forget
you will have to wait years for the stock to have a private or public market,
or you will need provisions for the founders to be forced to buy you out at a
minimum price by a specific date etc, it is a mess.

So again, the "best" way is to finance the work for them contractually and you
still may want to file a UCC lien to indicate you hold a lien on their
software asset until they pay. This way when investors or creditors go through
due-diligence they will see the company owes you money for the product and so
they will force the founder to pay you. To be fair, some investors get turned
off by liens, but the reality is most IME don't care as long as the founder
doesn't try to hide it and is up front.

I can share plenty of stories about doing these types of deals when I was
younger and getting hosed by people who I felt would always be stand up.

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Zigurd
He isn't a close friend. I'm asking for enough cash to make sure he is
serious. In the same vein, I would like to have an agreement that, should he
get an investment, would top me up to close to my usual rate.

The idea of a UCC lien is a very interesting idea, however, in this case,
there is a very limited amount of work to do before a zero-stage investor is
pitched. If that does not fly, I would of course lose all the non-cash
compensation, and the limited amount of code existing would not be saleable or
otherwise useful without a lot more work. No patents are involved yet, and
even if they were, there would be the time and effort to go from a provisional
to a full application involved.

If one were in a situation where compensation, over a longer time, is mostly
in founder's shares and there is an asset sale at the end of an unsuccessful
run, I can see such a lien being a really good idea.

To clarify and narrow my question: Is taking a SAFE fair? I'm pretty sure it
can be fair to me. But is it fair to the founder? Fair to an investor who
finds there is a founder-ish person in his same stock class?

Thanks for the very thoughtful response!

~~~
davismwfl
You're welcome. The obligatory IANAL.

If you are an accredited investor and meet the guidelines according to the SEC
then by all means a SAFE is totally fine although I'd still advise against it
for what you are doing. But if you don't meet the requirements as an
accredited investor executing a SAFE is dangerous for you and the founder as
it may (likely will) turn off other investors who are even more risk adverse
now than in the recent past.

Just my 2 cents, but unless what you are trying to secure is > $100-120k in
fees you are going about it in a way which will raise lots of questions for
the founder when they do go to raise and have little benefit for either of
you. A founder owing some consulting debt at their seed round is not abnormal
and is seen often, but a founder owing debt with stock guarantees/promises to
a non-accredited investor is an issue that will come up during any due
diligence.

I think you can definitely do a deal here if you really want, just need to
explore other options which are less likely to raise questions and stick with
common patterns because investors are worse then a deer in the woods. If they
see anything out of the ordinary on a cap table or diligence sheet it can at
worst spook them for good or at best just leave a sour taste in their mouth
which means everything else is an uphill battle of proof for the founder.

