For loans made to businesses, another type of note is the convertible promissory note. debt with equity risk). Pursuant to a SAFE, the investor makes a cash investment in return for a right to acquire shares at a later date (usually on the occurrence of priced capital raising). Similarities and differences: Convertible Note vs SAFE? Easiest to close. Convertible notes do in-fact generate interest for the investor, which … Often a standard convertible note or SAFE will contain a “valuation cap.” If there is a valuation cap, there is a chance your convertible note or SAFE could convert into equity, such as Series Seed Preferred Stock, at such valuation cap (rather than at some discount of the price the other purchasers in the financing are paying). The convertible promissory note is the instrument by which the debt is created. Post-money SAFE (ownership % SAFE / YC SAFE): The valuation cap on a SAFE refers to the post-money valuation. 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.. Often a standard convertible note or SAFE will contain a “valuation cap.” If there is a valuation cap, there is a chance your convertible note or SAFE could convert into equity, such as Series Seed Preferred Stock, at such valuation cap (rather than at some discount of the price the other purchasers in the financing are paying). Pre-Seed Capitalization: OK, now we do a $1.5 million convertible note or SAFE with a valuation cap of $6 million. Pre-money vs post-money conversion is a detail not always included in the terms of a note agreement, yet it can make a massive difference to the outcome of a new round of financing. True — if the money is there. Maturity Date: Date in the future. Interest Rate - The convertible note provides an interest rate to the investor. A SAFE note is a convertible security that, like an option or warrant, allows the investor to buy shares in a future priced round. It addresses many of the drawbacks and challenges posed by convertible notes and can be an equitable option for investors and founders. Startups may prefer SAFE notes because,... What are they benefits and how do they compare? which is sort of ironic. SAFEs, however, have several advantages over convertible notes. However, SAFE notes have no such provision. Therefore, these convertible notes go on the books in the same way as other debts, and need paying every month in the same way. SAFE: Equity. While convertible note is a debt, a SAFE note is not debt: a convertible note includes an interest rate and maturity rate, a SAFE note doesn’t. It often comes in the form of an offer by an investor who missed the last round and doesn’t want to miss the next round. 100% true, if it matters. If a convertible note hasn’t already converted to equity by the time the note expires, you have to pay back your investor’s principal investment plus interest. The first convertible or SAFE note issued in a company should have a cap on the total amount of notes than can be issued. So, it is always a better idea to know everything before you move ahead and sign the KISS convertible note. SAFE was created as a simple tool for seed investment that is purposefully designed to be easy to understand. Since the SAFE was created in 2013, many optimistic entrepreneurs have flocked to raise successive “mini-equity-rounds” using the SAFE format or traditional convertible notes. Valuation – by going down the convertible note / advanced subscription route the explicit question of company valuation is delayed until a future point in time (i.e. Convertible notes are very similar to SAFE notes, however, they differ in that they: Include a deadline, also known as the maturity date, where the debt must be converted into equity or repaid regardless of the current value of the company. Nuances: As with the convertible note and the SAFE agreement, there may be a cap, a discount, or both. In contrast, a convertible note is debt that has the right to convert into equity when you hit … Our SAFE and convertible note calculator will help you understand the potential dilutive impact of pre-money SAFEs, post-money SAFEs (aka YC SAFEs), and notes once they convert in a future priced round. Both … But both of these render a convertible note ineligible for SEIS/EIS as the investment is treated as a … SAFEs are short five-page documents. Definition of Safe and Convertible Notes A convertible note refers to a kind of debt that can usually convert to equity once the agreed-upon milestone is reached. Similarities and differences: Convertible Note vs SAFE? SAFE was created as a simple tool for seed investment that is purposefully designed to be easy to understand. Initially made available by Y Combinator (YC) in 2013 and subsequently updated in late 2018, the SAFE investment instrument was intended to improve on the highly popular convertible note used by startups during the seed stage or as a short-term bridge between equity funding rounds. The convertible note or SAFE round may make the most sense for you. This problem really boils down to who gets diluted and how much the company is worth. A SAFE is simpler and shorter than most convertible notes. The difference is that the convertible note is a debt instrument (or loan) that converts to equity. Purely from the perspective of founders, it is a fantastic deal. Usually no … Essentially, a SAFE is a warrant to purchase stock in a future priced round. Principal: The amount of cash that the stakeholder paid for the note. SAFEs (SAFE is an acronym that stands for “simple agreement for future equity”) were created by Y Combinator in 2013 as an alternative to convertible notes. We can ignore interest, which economically makes the SAFE and Note scenario exactly the same. There are two common types of convertible instruments: notes and SAFEs. It depends on the pre-money valuation of the subsequent priced round. To compare SAFEs with convertible notes, we filtered down the thousands of individual investments that AngelList tracks to only those that both: Used convertible instruments with a valuation cap (where specified) of under $20 million And as with the SAFE agreement, the KISS does a good job minimizing unintended consequences of convertible debt. It always ends badly for everyone, including the founder. The second reason to use a convertible note or SAFE is if you need to get the company funded between two equity rounds. SAFE (simple agreement for future equity) notes are a simpler alternative to convertible notes. A convertible note is a loan that converts into equity at a later point in time. A convertible note is debt, which means it will accrue interest rates like a loan, and needs to be repaid should the note reach its maturity date. Under the KISS convertible note, the note is repayable on the maturity date (typically 18-24 months from the date of the convertible note) if it has not already converted to shares. There are a few key differences between convertible notes and SAFEs that must be accounted for by business owners. A convertible note is debt, while a SAFE is a convertible security that is not debt. Conversion Discount: The discount applied to the price per share when the note holder will purchase shares in the next fundraising round. Convertible Note vs. SAFEs vs. Convertible Notes. SAFE was created by the startup accelerator Y-Combinator as a way to make seed investing easier and simpler. When you are deciding between doing a convertible note/SAFE or an equity round, look carefully at the terms being offered in both scenarios. Convertible notes are structured the same as loans. This lack of a requirement means that, unlike convertible notes which are on the books as a future debt, SAFE notes are on the capitalization table like stock options (which is what they are). Convertible Note A convertible note is a vehicle for raising funding. The terms of the note are substantially based on the keep-it-simple-security created by 500 Startups. Nonetheless, after a round of financing is closed, a convertible note automatically becomes shares of preferred stock. SAFEs solve a number of issues that convertible notes pose for startups and investors: Not debt instruments: Startups are not expected to repay the amount of the investment, eliminating any threat of insolvency (inability to repay a loan, should another investor self-defeatingly decide to call a note). SAFE stands for Simple Agreement for Future Equity. Anyone who holds a convertible note is a creditor like any other. Just like Convertible Notes, SAFE agreements can have valuation caps and discounts. Convertible notes (and the more recent SAFE) are a standard instrument for early stage investments in venture scale companies. The SAFE has fewer terms than a convertible note, and the convertible note is normally longer (and there are two documents). A convertible note is a short-term debt that has an interest or discount rate, a valuation cap, and a maturity date. A SAFE is a pre-payment for a future round of equity that may or may not happen. After my post about new changes to the Y Combinator SAFE notes I received a lot of questions and comments about convertible note vs priced round. As a result, a convertible note includes an interest rate and maturity rate, while a SAFE does not. This is probably not the case with a SAFE, which looks more like an option. Y Combinator created the SAFE (Simple Agreement for Future Equity) a few years ago as an “upgrade” on convertible notes. Because a convertible note does not require the same negotiation and integration of rights and privileges that a Preferred Stock round does, it … SAFE vs. convertible note Because a convertible promissory note can be converted into equity, it is a security. Convertible bonds are bonds, while DEEE notes are warrants. Although they’re still used, convertible notes were considered as the predecessors to simple agreements for future equity. Just like convertible notes, SAFE notes will convert at either (a) a discount, or (b) a cap. SAFEs convert into stock in a future priced round. But what the investor buys is not debt, but something more like a warrant. Nuances: As with the convertible note and the SAFE agreement, there may be a cap, a discount, or both. There are two main forms of note used in Southeast Asia: the KISS-style note used by 500 Startups, and the SAFE note based on the note developed by Y Combinator. This Practice Note explains the main features of convertible notes and the simple agreement for future equity (SAFE) used in seed financings. There is no interest or set maturity date of a SAFE note. Difference between SAFEs & Convertible notes – pros and cons. Now let’s replay the above steps, except instead of doing an equity round for the seed, let’s do a convertible note or SAFE round. A “SAFE,” which stands for “Simple Agreement for Future Equity,” is an investment instrument similar to a convertible promissory note, meant for use in early-stage investment.The SAFE is an investment document that is not a debt instrument, but rather appears on the company’s capitalization table like other convertible securities such as options. A SAFE note, unlike a convertible note, is a simple written agreement between an early stage startup founder or co-founder and investor which provides for the convertible debt into priced equity. 3. Now let’s replay the above steps, except instead of doing an equity round for the seed, let’s do a convertible note or SAFE round. Applies to these Convertible types: Convertible debt, Convertible security, and SAFE. A safe is like a convertible note in that the investor buys not stock itself but the right to buy stock in an equity round when it occurs. The price per share for the convertible note or SAFE would then be calculated as 0.75 x $1 = $0.75. a SAFE only allows for a conversion into the next round of financing. Like any other promissory note, a convertible promissory note can be secured or unsecured. For example, if the stakeholder invested $10,000, then $10,000 is the principal amount. Investors can choose to convert convertible notes into preferred shares on … A Convertible Note is a debt security issued by a startup which converts to equity (shares) based on a future priced equity round (i.e. Conversion Discount: The discount applied to the price per share when the note holder will purchase shares in the next fundraising round. The KISS note template is much more complex than the SAFE convertible note, but it is much more balanced. The technology start-up sector also uses two types of alternative investments, one called a “conversion note” and a “SAFE note.” Like the safe note, convertible bonds are also used to promise investors that they will receive additional shares in the future. We can ignore interest, which economically makes the SAFE and Note scenario exactly the same. A convertible note is debt that can convert into equity upon a future qualifying event or transaction, like a priced equity round of $1 million or more. And if the money is there, this can make them super convenient. The valuation caps are the only negotiable detail. 41{icon} {views}A convertible note is a debt, while a SAFE is non-debt convertible security. Are much longer than a SAFE note and are therefore more likely to be misunderstood by one or both parties. Companies should think of a convertible note or SAFE as a part of their larger equity round, because, they are the same. SAFE notes will convert either at the discretionary of the investor or at the next priced round, depending on the conversion clause in the SAFE note agreement. SAFE notes were developed by Y Combinator in response to difficulties experienced from convertible note agreements. A SAFE is a Simple Agreement for Future Equity – a type of convertible note. A convertible note allows the investor to get their money back e.g. Convertible Note. Most complicated of these three. Investors use convertible notes to invest in startups in the early stages of development. A SAFE (Simple Agreement for Future Equity) is an agreement between an investor and a company. It’s similar to the convertible note, however, a SAFE is an equity structure, not a debt structure. Convertible notes have been around for a longer time whereas safe notes have been invented more recently (in 2013). A convertible note is debt, while a SAFE is a convertible security that is not debt. As a result, a convertible note includes an interest rate and maturity rate, while a SAFE does not. A SAFE is simpler and shorter than most convertible notes. Hence, in this case, convertible note allows for better control for the company as compared to the SAFE note. However, convertible notes allow for conversion within the same round of financing, i.e., with seed financing as well. To explain better, a SAFE is a convertible note that allows investors to purchase shares in a future priced round. BREAKDOWN OF A TERM SHEET • SAFE vs. CONVERTIBLE NOTE vs. EQUITY (PREFERED EQUITY) • ECONOMIC TERMS – regulate return the investors will ultimately get at exit. A SAFE is basically a convertible note that, in an attempt to simplify, has eliminated the interest and maturity components. There are a few differences between convertible notes and SAFEs. In contrast, a convertible note is debt that has the right to convert into equity when you hit … Principal: The amount of cash that the stakeholder paid for the note. After all, if no conversion happens in the future, it becomes a loan. A Convertible Note is a debt instrument that converts into equity later upon an event such as raising an equity round or reaching a maturity date. One that provides rights to the investor for future equity in the company; similar to a warrant, except without determining a specific price per share at the time of the initial investment. Because a convertible note does not require the same negotiation and integration of rights and privileges that a Preferred Stock round does, it … The SAFE document is a great stab at simplifying seed-stage deals, and we commend Y-Combinator for the effort. SAFE Notes Made Simple. (Another increasingly popular investing tool is the note-alternative, which is discussed here.) Founders looking to raise money for their startup will often ask which method they should use in a seed round. It addresses a lot of challenges and drawbacks that convertible notes have. A short-term unsecured promissory note is the type most often used when a relatively small amount of money is borrowed from a friend or relative. Pre-Seed Capitalization: OK, now we do a $1.5 million convertible note or SAFE with a valuation cap of $6 million. SAFE vs. Convertible Note. Nonetheless, convertible promissory notes remain the … on a sale of the company, and also to earn interest on their investment. (Note that the convertible debt does not appear on the cap table initially because we do not know how many shares the convertible debt will convert to.) A safe can have a valuation cap, or be uncapped, just like a note. Discount – when conversion takes place, the price paid for shares is at a discount to the given share price – usually in the range 15% to 30%. Of course, you can always opt to extend the maturity date, but you have to get your investor’s permission to amend the note. Both SAFEs and convertible notes convert into equity in a future priced equity round; a convertible note may have more complexity to when/if/how it converts. A Convertible Loan Note is faster than a more traditional route of a priced equity funding round but still has terms for negotiation. It's a promissory note, but instead of being repaid as cash, the debt is converted into equity during your next priced round. Anyone who holds a convertible note is a creditor like any other. Level of simplicity: More complex than SAFE notes but less than equity. Because of this, it is a great equitable option for founders and investors. Because SAFEs are not loans, the company does not have indebtedness on its balance sheets, so the threat of insolvency is reduced (when the maturity date of a convertible note is reached the company has … Cons: As compared to Safe, a convertible note is usually a longer and more complex document. Comparing the SAFE to Convertible Notes. SAFEs and convertible debt are cheaper / faster to do than equity. Investors are rewarded for their early investment with a discount to the price per share paid by the equity round investors. “SAFE” VS. Convertible Note. A convertible note is debt, while a safe note is a convertible … In the best case scenario (from the investors’ side of the table), there is no material difference. Valuation Cap - Uncapped The valuation cap puts a ceiling on the valuation at which the note converts to equity. While convertible note is a debt, a SAFE note is not debt so while a convertible note includes an interest rate and maturity rate, a SAFE note doesn’t. 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