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SAFE vs. Convertible Note

Apr 15 2023 by

SAFE (Simple Agreement for Future Equity) and convertible notes are both types of financing instruments used by startups to raise capital. However, there are some key differences between the two:

  1. Structure: A SAFE is a simpler, faster, and less expensive way to raise capital compared to a convertible note. A SAFE is a simple document that sets out the terms and conditions of the financing, while a convertible note is a more complex instrument that requires the negotiation and drafting of a loan agreement, security documents, and other legal documentation.

  2. Conversion terms: A SAFE provides a clear and straightforward mechanism for the conversion of the investment into equity. The conversion terms are set out in the SAFE agreement and are typically based on a future equity financing round or a specified time period. Convertible notes, on the other hand, have more complex conversion terms that can include a conversion price, a discount, and a cap on the conversion price.

  3. Interest and maturity: Convertible notes typically include an interest rate and a maturity date, while SAFEs do not.

  4. Negotiations: The negotiation process for a SAFE is typically much simpler and quicker than for a convertible note. This is because SAFEs have fewer terms and conditions that need to be agreed upon, and the process is streamlined compared to the negotiation of a convertible note.

  5. Tax implications: The tax implications of SAFEs and convertible notes can vary depending on the jurisdiction and the specific terms of the transaction. It is important to consult with a tax professional to ensure that the transaction is structured in a tax-efficient manner.

In summary, SAFEs are a simpler and more streamlined alternative to convertible notes, and are often a more attractive option for startups that are looking for a quick and easy way to raise capital. However, the choice between a SAFE and a convertible note will depend on the specific needs and circumstances of the startup and the investor.