Can an LLC use a SAFE?


The short answer is: That’s not what they were designed for.

The longer answer is that you shouldn’t use a standard SAFE note to raise capital with an LLC, because it specifically contemplates a type of investment that LLCs cannot do. Namely, a priced, preferred stock round with a venture-capital firm. Most venture capital firms are legally prohibited from investing in pass-through entities, which includes almost all LLCs (unless you’re the very rare LLC that is taxed as a C-corp).

It is at least theoretically possible to modify a SAFE note to contemplate a priced-preferred ownership round with a person or entity that is not prohibited from investing in LLCs, such as an individual investor or group of investors, but that is not the standard trajectory for most startup companies. And that is not a “simple” agreement for anything. That is a rather complicated agreement. And it probably won’t be cheap to get a lawyer to do that for you (assuming the lawyer knows what they’re doing in the first place). If that’s what you’d like to do, you might need to rethink whether you’re doing the right thing for your business.

And it is also at least theoretically possible to modify a SAFE note to contemplate a priced preferred ownership round with a person or entity after the LLC converts from an LLC to a C corporation. But that is not what is contemplated by the standard SAFE note, and this should be done in consultation with tax counsel. Once again, this also makes the SAFE, designed to be a very simple agreement, decidedly less simple.

If you’re asking this question, there’s a good chance that you haven’t fully thought through your organization’s business trajectory. And that is something that is more consequential than the nuances of what types of documents are suitable for your short-term business needs. Perhaps you should convert to a C corporation in Delaware, if you want to go the venture route. Perhaps the venture route is not right for you. But you should almost certainly pause and re-consider your organization’s structure and the potential future trajectory with investors.