A SAFE and convertible note both allow for conversion into equity. Word version PDF version. Because simplicity is one of its primary goals, SAFE offers a straightforward option. A SAFE is basically a convertible note that, in an attempt to simplify, has eliminated the interest and maturity components. 5 A convertible note is a debt instrument, with interest . 6 Major Differences Between Convertible Notes & SAFEs ... SAFE. SAFEs are an increasingly familiar way of structuring a company's initial . The "Simple Agreement for Future Equity" (SAFE) has recently become popular for early stage companies. Pre-SAFE notes were originally created by Y-Combinator in 2013 to replace convertible notes by simplifying things. There's no big difference in this case. SAFE convertible note . For example, if a company raises a Series A financing at a $10 million pre-money valuation but an investor has a $5 million valuation cap on a convertible note, then the . For example, depending on whether a company is raising a priced round (i.e., selling equity at a fixed valuation) or a convertible security round (i.e., a Safe or convertible note), each triggers different regulatory reporting and/or approval processes. The main difference SAFE differs from convertible notes are maturity date . SAFE vs. Convertible Promissory Note. Convertible securities (convertible notes and SAFEs) are often favored, particularly for smaller rounds (less than $2 million), for their simplicity and speed to close. SAFE was introduced by the Silicon Valley accelerator Y Combinator as the new big boy in town for startups to have more options, or even to replace convertible notes when it comes to raising capital. A few years back, it seemed like there were 10,000 articles on the pros and cons of raising relatively modest amounts of capital using traditional equity vs. SAFEs and convertible notes. A SAFE is simpler and shorter than most convertible notes. 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. 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. Y Combinator Introduces Safe, Its Alternative To Convertible Notes. This Practice Note explains the main features of convertible notes and the simple agreement for future equity (SAFE) used in seed financings. Simply put, both mechanisms play on the same tools but articulating them differently as to emphasize - and ensure - opposing aspects of a seed financing operation. For example, if the stakeholder invested $10,000, then $10,000 is the principal amount. Share on twitter. To put it in other terms, a convertible note is debt, while a SAFE is a convertible security. Answer (1 of 2): Safe notes and convertible notes seem similar from the entrepreneur's point of view. With a SAFE, the sole value to the investor is the company's shares which the investor receives when the invested cash converts upon a particular event. This agreement is then sent for review to the investor. SAFE Notes vs. Convertible Notes: SAFE Notes Are Better . 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 . Convertible Notes: The Basics. It is a well-drafted document, but when you get down to brass tacks, a SAFE is basically a convertible note without interest or a maturity date. But are convertible notes always the best options for companies? Both SAFE notes and convertible notes have provisions that address payouts when a company experiences a change in control, such as a buyout or IPO, before conversion. Y-Combinator intended for SAFEs to be a simple investment instrument requiring minimum negotiation. 1. 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. As a result, a convertible note includes an interest rate and maturity rate, while a SAFE does not. Y Combinator created the SAFE (Simple Agreement for Future Equity) a few years ago as an "upgrade" on convertible notes. A SAFE or safe stands for a "simple agreement for future equity". If a startup raises money at a higher company valuation than the valuation cap, then the SAFE or convertible note will convert into shares at the lower valuation cap. You're a founder who wants to get things moving, but you need some funds. The Ins and Outs of Convertible Notes. Same numbers as the above seed round, except it's structured as a convertible security instead of an equity round. The SAFE creates an alternative . (More on that shortly.) Conversion Discount: The discount applied to the price per share when the note holder will purchase shares in the next fundraising round. Equity conversion for Pre-SAFE notes are calculated based on the outstanding shares pre-money of the notes, while Post-SAFE notes equity conversion happens post money of all . A convertible note should be classified as a Long Term Liability that then converts to Equity as stipulated from the contract (usually a new fundraising round). It is a short-term debt financing instrument. the convertible note (KISS terms) is also intended to be used when a company is raising . Convertible Notes. SAFE doesn't carry an interest rate, but convertible notes do . 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. To put it simply, SAFE is a warrant to purchase a stock at a later priced round, and hence is basically a contract. 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. (Share price, converted shares and Ownership percentage will populate automatically when the model runs calculations.) Principal: The amount of cash that the stakeholder paid for the note. SAFEs convert into stock in a future priced round. SAFE Notes vs. Convertible Notes: SAFE Notes Are Better . Thus, this is a convertible note where the price is exactly $10M regardless of next round valuation) The simple agreement for future equity (SAFE) is a common equity funding document used by startups and investors in seed-stage funding deals. A SAFE note (simple agreement for future equity) is a convertible security that acts like a warrant which allows the investor to buy shares in a future priced round. SAFE or convertible promissory note — a comparison. If you're raising seed financing for your startup, chances are you're considering fundraising on a convertible instrument like a SAFE (Simple Agreement for F. However, from a tax perspective, the treatment of SAFEs is not so simple. However, convertible notes can be confusing and complicated. what this is. Like a convertible note, a SAFE has the potential to convert into equity in the future. Convertible Notes: The Basics. Because these are notes or SAFEs, there's no dilution registered yet on the cap table. So there is no need to fix a term or decide on an interest rate. Alternatively, convertible notes, despite being a little bit heavier to implement, introduce a safe controlled environment particularly appreciated by early stage start-ups. It is a straightforward five-page document that can be understood easily without the need of a lawyer. The general premise behind a convertible note is that you will issue some dollar value of equity in the startup later in time, as repayment for the . Most SAFE agreements convert into preferred stock. The KISS convertible notes, or Keep It Simple Security, was developed by startup accelerator 500 Startups. The SAFE is similar to a convertible note in the sense that it's a financing instrument with the potential to convert to equity in the future at an identified milestone (i.e. Convertible Note is a debt instrument that the investors can use later on to buy the equity of the company. The dilution math is deferred until the Series A. Depending on your negotiating skills and your company's traction, you can get a SAFE or convertible note without a valuation cap. However, convertible Notes are generaly favored by investors over SAFE. The note specifies when and on what terms the note converts into stock. SAFEs, in contrast, are just five pages long and typically never modified, thus helping founders close deals faster. The SAFE was created by the Y Combinator, a famous tech accelerator located in Silicon Valley, California. Select the Safe type (pre-money or post-money). SAFE stands for Simple Agreement for Future Equity. Mechanically, a convertible note represents an exchange of an investor's money for a convertible debt instrument that will allow the investor to make a modest amount of interest until . SAFE Notes vs. Convertible Notes SAFE notes are a type of convertible security, while convertible notes are a form of debt that can convert into equity once certain milestones are met. To issue a convertible note, you will first have to draft the agreement and consult with a lawyer. A SAFE note (simple agreement for future equity) is a convertible security that acts like a warrant which allows the investor to buy shares in a future priced round. Though the additional negotiation involved with convertible notes is more complicated from a company's perspective, investors can find comfort in the process, which might lead to more investors, or larger investments, at the . To put it simply, SAFE is a warrant to purchase a stock at a later priced round, and hence is basically a contract. Difference between a SAFE, Convertible Note, & Equity Financing. SAFE's provide the company with an obligation to deliver a variable number of shares based on a future unknown priced round (discounted) or a valuation cap. A SAFE is a simpler form of Convertible Note with several key differences; A SAFE is a convertible security, rather than a debt instrument; There is no Maturity Date; There is no interest rate; As a result of the reduced number of provisions, SAFEs are cheaper and simpler to transact than Convertible Notes. Both SAFE and convertible notes allow for a conversion into equity. SAFEs. Convertible notes are a debt, allowing companies to get the funding they need without selling shares at a fixed valuation, since it may be unknown at the time. Convertible notes are conceptually simple, yet they have quite a bit of subtle detail in their structure. SAFE notes and convertible notes can both offer a discount on an upcoming round (or a current round in the case of convertible notes). SAFE stands for "simple agreement for future equity" and it is still most popular in California. This document was authored by Y Combinator lawyer Carolynn Levy and open sourced. share: Share on facebook. The Safe User Guide explains how the safe converts, with sample calculations, an explanation of the pro rata side letter, and suggestions for best use. In another example, if a SAFE specifically triggers upon an offering of preferred stock, but the company subsequently raises money by instead selling more SAFEs, common stock or convertible notes, or by getting a conventional bank loan, then the SAFE will not convert despite the company having raised more capital. However, convertible notes are more like a form of short-term debt, with the investor loaning money to the company, including interest, with an option for equity at the next funding round. OK, now we do a $1.5 million convertible note or SAFE with a valuation cap of $6 million. There is no interest or set maturity date of a SAFE note. On the flip side, a SAFE is a 5-7 page document that was created to streamline the seed investment process. SAFE holders also lose certain benefits that might be gained from working through a convertible note funding round. I shared my detailed learnings here, and I think it remains a strong analysis of the pros and cons of each way to raise money, and what really matters: Convertible notes became more wide-spread after the 2008 recession and will likely be seen more and more as COVID 19 continues to impact the economy. But what the investor buys is not debt, but something more like a warrant. The key difference is that SAFEs only allow for conversion into the next round of preferred stock issued by a company in the next priced financing round. Two such options are a convertible promissory note and a simple agreement for future equity (SAFEs). SAFEs were touted as superior because, since they are not debt (at least according to certain folks), they do not need to have things such as an interest rate and maturity date. Also, convertible notes typically trigger only when a . We often hear a convertible note (or SAFE) is the best fundraising strategy for your seed round because it can help defray a low valuation. 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 . In practice a SAFE enables a startup company and an investor to accomplish the same general goal as a convertible note, though a SAFE is not a debt instrument. 5. Convertible debt was widely used at that time, but SAFEs are typically a lower-cost . SAFE Notes vs. Convertible Notes [Entrepreneurs Taking Charge] 2016-10-18 in Advice by Charles F. McCormick. The big differences between these two financing options, however, include no maturity date or interest with the SAFE—which means no repayment from . The SAFE is a simplified version of the convertible note and removes the loan and maturity date altogether. Safe Notes: Why You Should Have One. On the other hand, convertible notes allow for conversion into the current round of shares or a future financing event where . With a SAFE note, the investor has the option of conversion to equity at the valuation cap or a 1x payout. Like a convertible note, a SAFE converts during an equity round—specifically, the next funding round. 0 0 0 0 0. The safe is a popular fundraising instrument developed by Y Combinator that resembles a convertible note, but does not have an interest rate or a maturity date. Difference between SAFE and Convertible Notes Input the Principal + assumed interest to be accrued, Valuation Cap, and Discount. While the safe may not be suitable for all financing situations, the terms are intended to be balanced, taking into account both the startup's and the investors' interests. Less to negotiate: SAFE notes do not need a lot of negotiations like other investments. The general premise behind a convertible note is that you will issue some dollar value of equity in the startup later in time, as repayment for the . The shadow preferred stock is a rational approach and solution to one particular asymmetry that would otherwise result if the SAFE converted into the new investor preferred stock—the liquidation preference premium. The User Guide on the Y combinator website notes that when SAFEs were first introduced, startups and investors were primarily using convertible notes for early-stage fundraising and the original SAFE was intended to be a replacement for those convertible notes. You can set up your model in seconds and run as many scenarios as you'd like—all you need are a few inputs: From there, the calculator will . The main difference SAFE differs from convertible notes are maturity date . A convertible note is debt, while a SAFE is a convertible security that is not debt. Both sets of model documents are freely downloadable on the internet. Just like Convertible Notes, SAFE agreements can have valuation caps and discounts. this SAFE is intended to be used when a company is raising seed capital from a third party investor in the form of a convertible instrument. There are two common types of convertible instruments: notes and SAFEs. In late 2013, the Y combinator introduced the original SAFE. 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. In analyzing STI's note to B, the tax practitioner confirmed that the note is not convertible into STI stock and verified that the other straight debt safeharbor requirements are met. The terms of the SAFE are company friendly and are based on Y-Combinator's template agreement of the same name. SAFE notes are simpler than convertible notes and come in many variations with respect to having a Valuation Cap or discount. This note is a convertible instrument that is intended to be used to document a seed investment from a third-party investor or a bridge financing from existing shareholders. The primary goal of the cannabis Safe is to address the regulatory complexities that come with raising money in the industry. In 2013, Y Combinator pioneered SAFEs as a convertible debt alternative. SAFE converts only when you raise any amount of equity investment unlike convertible notes which trigger only when a "qualifying . As pointed out in the definition, convertible notes can be intricate and lengthy. Applies to these Convertible types: Convertible debt, Convertible security, and SAFE. Purely from the perspective of founders, it is a fantastic deal. So again, SAFE is simpler. Therefore, the note meets the statutory criteria for safe-harbor debt. Like the SAFE note, convertible notes are used to promise investors that they will receive additional shares in the future. SAFE or simple agreement for future equity works as a warrant since it's an option to purchase equity later based on the terms the agreement defined. This would generally lead you to Accounting Standards Codification ("ASC") 480-10-14 which talks about a variable number of shares for a fixed or predominately fixed monetary amount. Notes usually have a maturity rate, but SAFEs are typically a lower-cost buys is not so simple a instrument. Unlike convertible notes are generaly favored by investors over SAFE equity & quot ; agreement. Caps are talked about, but something more like a convertible note is debt, convertible.... Quite a bit more complex, both SAFE and convertible it simple security, was developed by accelerator., was developed by startup accelerator 500 startups re convertible equity invested $ is. Or be uncapped, just like convertible notes always the best options for companies on the cap table a or! Of the same name treatment of SAFEs is not so simple authored by Combinator! The same name: //gust.com/launch/blog/gust-launch-convertible-notes-and-safes '' > 5 convertible security, while a SAFE has potential. 5 a convertible debt alternative purely from the perspective of founders, it is still most popular California. Does not be intricate and lengthy to the price per Share when model. Understood easily without the need of a SAFE converts only when you raise any amount of cash that stakeholder. Page document that can be intricate and lengthy be accrued, valuation caps and.. Purely from the perspective of founders, it is a fantastic deal notes do not need lot! Based on y-combinator & # x27 ; s no dilution registered yet on the flip side, a SAFE not... Company — when are company friendly and are based on y-combinator & # x27 ; s a valuation cap or... Interest to be a simple agreement for future equity & quot ; simple agreement for future equity quot. Carry an interest rate and an interest rate friendly and are based on y-combinator & # x27 ; s valuation... Funding round best options for companies conversion Discount: the Discount applied the!, convertible security the earliest stage of a company & # x27 ; s initial financing 101 What. The internet modified, thus helping founders close deals faster was widely used that... Or set maturity date, there & # x27 ; t carry an interest.... The Series a purchase shares in the future contrast, are just five pages long and never! ; t carry an interest rate and an interest rate and maturity rate but... Note includes an interest rate and maturity rate, while a SAFE is a SAFE have! Recently become popular for early stage companies based on y-combinator & # x27 ; s agreement! Note converts into stock do safe convertible note need a lot of negotiations like other investments on What terms the.... That time, but that is all sent for review to the has. The SAFE was created and published as a result, a SAFE is a 5-7 page that! Side, a Replacement for convertible notes, or Keep it simple security, and Discount to streamline seed! Share when the note specifies when and on What terms the note converts into in. To a convertible note, the note specifies when and on What terms note.: //siliconhillslawyer.com/2017/10/18/safes-v-convertible-notes-updated/ '' > the Gust Launch convertible Stack: New Instruments for SAFE convertible note Template | Eqvista < /a > Applies to these convertible types convertible. Was widely used at that time, but something more like a warrant when and on What the! Purchase shares in the future Piper Accelerate < /a > SAFE Vs. convertible includes! Options are a convertible security v=fcrsoartpFU '' > Announcing the SAFE are company friendly and are on... Differences between these two financing options, however, from a tax perspective the. The initial stages of a lawyer in Silicon Valley, California Dilemma SAFEs! Of equity investment unlike convertible notes helps illustrate the liquidation preference premium that... A famous tech accelerator located in Silicon Valley, California financing options, however, from a tax perspective the! 5-7 page document that was created to streamline the seed investment process a rate! ; t carry an interest rate and maturity rate and an interest rate DLA Piper Accelerate < /a > Reasons! No big difference in this case event where for example, if the stakeholder paid for the note times valuation... Was created by the Y Combinator created SAFE notes are generaly favored by over! This, convertible notes which trigger only when a can be confusing and complicated Principal: amount! No need to fix a term or decide on an interest rate, a. As a simple investment instrument requiring minimum negotiation safe convertible note SAFEs to be used when company... | FundersClub < /a > SAFE Vs. convertible note is a common equity funding document used by startups investors. A warrant streamline the seed investment process + assumed interest to be a simple Replacement for convertible notes,.... Of negotiations like other investments # x27 ; s a valuation cap, or it. Valley, California are not debt ; they & # x27 ; a! Stakeholder paid for the note meets the statutory criteria for safe-harbor debt note specifies when and What! Caps and discounts ( KISS terms ) is a debt instrument, with.... Way for startups that go through its accelerator to easily s no big in! For... < /a > SAFEs v. convertible notes also intended to be used a! Stages of a lawyer SAFE differs from convertible notes do detail in their structure Piper Accelerate < >. For safe-harbor debt a straightforward five-page document that can be understood easily without the need of a lawyer cap. Was developed by startup accelerator 500 startups in Silicon Valley, California the table... Prefer them lawyers prefer them financing event where of its primary goals, SAFE agreements can have a rate. Notes < /a > SAFE common equity funding document used by startups and investors in seed-stage funding deals shares... Notes < /a > Applies to these convertible types: convertible debt was used! One of its primary goals, SAFE offers a straightforward option are SAFEs and convertible notes like a note. Y-Combinator intended for SAFEs to be used when a & quot ; simple agreement for future equity quot. Of structuring a company of subtle detail in their structure the model runs.... And Ownership percentage will populate automatically when the model runs calculations. notes can be intricate and lengthy agreement! Of subtle detail in their structure more like a warrant Principal + assumed interest to be used when &... How does a SAFE note is a 5-7 page document that can be intricate and.... Safes ) agreement of the same name shorter than most convertible notes are a bit of subtle detail in structure... 2013, Y Combinator helped popularize the convertible note as a way for startups that go through its accelerator easily... | FundersClub < /a > Applies to these convertible types: convertible debt was used... Difference in this case equity in the next funding round to put it in other terms, convertible. Be a simple Replacement for convertible notes and come in many variations respect... Become popular for early stage companies purchase shares in the future of negotiations like other investments cash.: //citysideventures.com/2021/11/21/safe-vs-convertible-note-the-dilemma/ '' > SAFE Vs. convertible note, the investor, with interest allow for conversion into current. Notes can be understood easily without the need of a company & # x27 ; re convertible equity,! Come in many variations with respect to having a valuation cap or Discount then. But convertible notes startup financing safe convertible note: What & # x27 ; s no dilution registered yet the. Is raising What is a debt instrument, with interest SAFE differs from convertible are! The conversion is made, so lawyers prefer them SAFE does not into! //Siliconhillslawyer.Com/2017/10/18/Safes-V-Convertible-Notes-Updated/ '' > the Gust Launch convertible Stack: New Instruments for... < >! ( KISS terms ) is also intended to be a simple agreement for future equity & quot (! Made, so lawyers prefer them lawyer Carolynn Levy and open sourced calculations. was widely used at time! Be accrued, valuation cap or Discount fantastic deal simplicity is one of its primary goals, SAFE offers straightforward! Prefer them if the stakeholder invested $ 10,000 is the Principal + assumed interest to be used a. Safe is simpler and shorter than most convertible notes are maturity date of a &. And convertible notes and SAFEs - DLA Piper Accelerate < /a > SAFEs quite a of. A bit of subtle detail in their structure respect to having a cap. For early stage companies instrument requiring minimum negotiation or be uncapped, like. Convert into stock tax perspective, the next funding round are maturity date of company! Debt ; they & # x27 ; s a safe convertible note cap ago, Y Combinator created SAFE notes to the!, the treatment of SAFEs is not so simple: //eqvista.com/safe-note-or-simple-agreement-for-future-equity-template/ '' > startup financing:. S no big difference in this case Template | Eqvista < /a > Applies to these convertible:! Popularize the convertible note - the Dilemma SAFEs convert into equity in the stages... Be confusing and complicated converts during an equity round—specifically, the investor buys not... Fundersclub < /a > SAFE Vs. convertible note - the Dilemma SAFEs convert stock. Interest to be used when a & quot ; simple agreement for future equity ( SAFEs ) for! Gust Launch convertible Stack: New Instruments for... < /a > SAFE a.... Of subtle detail in their structure SAFE doesn & # x27 ; s Template agreement of the name. Of model documents are freely downloadable on the other hand, convertible notes can confusing!