Giving Compass' Take:

• Writing for Next Billion, Will Poole — cofounder and managing partner at Capria and Unitus Ventures — describes a dicey situation with an entrepreneur in South America, and how "Simple Agreement for Future Equity" (SAFE) helped protect his investment. He presents some lessons for other funders who may be considering the instrument.

• SAFEs have their drawbacks, but following the basic lessons here — like diligently checking on the integrity of any potential partner — should ensure that deals don't go bad.

• Want some more impact investing advice? Click here.

Many in the tech investment sector are familiar with the founder-friendly “Simple Agreement for Future Equity' (SAFE). SAFEs are commonly used, yet they can be misunderstood by entrepreneurs — and risky for investors.

Our global investment firm Capria recently had a bad experience with an entrepreneur in South America. The entrepreneur was building a business that improved livelihoods at a very nice scale, while catering to the needs of local businesses. He had spent time in Silicon Valley and was acquainted with the SAFE, as he had had friends go through YC and saw how easily they collected checks. He wanted to do the same for his startup, which was incorporated in a country with a rising entrepreneurial community, but a nascent ecosystem from the legal and governance perspective. Our local counsel said that the SAFE could be executed in this county, but to ensure it would be interpreted correctly by a judge who would not be remotely conversant in such securities offerings, we’d have to have an accompanying investment agreement that effectively spelled out how the SAFE worked under the local jurisprudence.

Somewhere in the due diligence (DD) process, the entrepreneur stopped providing us and our local partner with the information we requested ...

Fast forward another 60 days, critical DD information was still not provided, and the entrepreneur was not being particularly responsive. Somewhere along the way, he made remarks to the effect that maybe he would just go directly to Series A investors and skip the lower-valuation SAFE we had signed ...

A few weeks later, the entrepreneur informed us that he would not honor the signed SAFE agreement. As the agreement is binding on both sides, this was not his decision to make. But the fact that he would take such an action called into question his integrity. We’re happy not to be working with him; we’ll sort out the business ramifications at a later date.

There is nothing more important than integrity. Reference check your entrepreneurs’ values and integrity every way you can. As an investor, one thing you worry about the most is getting into a long-term relationship with an entrepreneur who does not share your values, or who is outright dishonest.

Complexity is the enemy of success. Keep things as simple as possible and get deals done. We looked back at the time and complexity of trying to embrace the SAFE as required by the entrepreneur. Doing so outside of Silicon Valley, where the instrument is not understood, is simply a bad idea.

Sometimes you get lucky and dodge a bullet. In the example I’ve explained here, if we had followed lesson #2 and forced the deal to be simple, and if the entrepreneur had provided financial DD information promptly, we would have funded the deal with an entrepreneur who had underlying integrity issues. Who knows where that would have gone in the future.

Read the full article about lessons learned from a broken impact investing deal by Will Poole at NextBillion.