Types of Securities

What is preferred equity?Preferred stockholders have ownership in a company. However, unlike common stockholders, preferred stockholders do not have voting rights or management rights. Founders and employees of a company are usually common stockholders.

Only a few years ago, legal fees cost upwards of $50,000 to properly set up a stock financing. It was uneconomical to pay this amount unless venture capitalists were investing millions in a Series A. Nowadays, some startups can use open-sourced "priced round" documents to reduce the costs of a stock financing at the seed stage.

Stock is one of the most popular types of assets for any investor to buy, whether they’re a hedge fund executive managing billions of dollars’ worth of assets, or a beginner looking to start their own portfolio. But not all stock is created equal!

One of the most common methods used to invest in early stage startups is something called a convertible note. A convertible note is a loan that converts into equity after the company has a bit more operating history under its belt and there is more information available to establish a fair price.

A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company.

When sourcing capital for a new business venture, entrepreneurs utilize one of two basic structures: debt or equity. Debt is a capital source with a finite life and clearly defined return profile known at the initial investment. With debt financing, a company is required to pay interest throughout the term of the loan with principal repaid at maturity. Conversely, equity investors are issued shares representing ownership in an enterprise. While equity does not require repayment over a defined time period, an entrepreneur’s stake in his or her company is diluted through the issuance of equity to outside investors.

A Crowd SAFE is an investment contract between investors and companies looking to raise capital. Individuals make investments for the chance to earn a return—in the form of equity in the company or a cash payout—if the company is acquired, goes public, or sells all of its assets.

The NextSeed SAFE is a version of the traditional SAFE that has been customized for crowdfunding. It aims to supplement the flexibility of the SAFE with specific rules that make cap table management easier for Issuers and protect investors with respect to potential dividend payments.

A SAFE is a popular method to invest in super early-stage companies. At its core, it’s an agreement – an investor puts money into a startup today and both parties agree that, in the future, that money can convert into stock.