Convertible Notes vs. SAFEs

Is a SAFE the same as a convertible when raising funds? Many first time founders typically raise their first few funds either way, so I would appreciate expert advice. Also, if they aren’t the same, what are their main differences, and which is the better route?

There will be a lot of time devoted to this question in the fundraising classes, but briefly: both are ways to raise money quickly from (usually) early-stage investors who want to invest (often) smaller amounts. Both permit companies to avoid the hassle of negotiating an entire set of financing documents, preferred terms, valuation, etc. You can complete a Note round in 15-20 minutes and 1-2 documents instead of $25,000 of preferred financing documents and weeks of suffering. 

Think of them both as “advances” against the next round, as the money converts into the next preferred financing: take the money now with minimal hassle and convert it later when you have built some value. This is the good dilution principle working for everyone, within reason.

Convertible Notes are debt instruments, which carry interest rates and other debt terms, like a maturity, or due date, if they are not converted into stock first. In case of insolvency, holders of Notes are creditors. SAFEs are not debt and usually have no maturity date. Notes often have bonus features for the holders for taking the early risk, like a discounted purchase price of the next round of preferred stock, or a cap (or limit) on how high the imputed value is for the next round (since you are using the investor’s money to dilute the investor, they often want some reasonable limit). Now, SAFEs frequently have most of the same terms, except interest and the debt character, but vary wildly. For example, does a SAFE convert as measured by the pre- or post-money of the next round? Does it include pro-rata and other rights? They are evolving and everyone is a slightly different flavor. A little bit more than I can quickly cover here, but stay tuned. 

Convertible Notes are the traditional way bridge, or interim, financings were done. SAFEs are the new kid on the block and definitely all the rage. SAFEs are often considered more founder-friendly, but I am not so sure I fully agree there. Was I a founder and liked my investors (or wanted a wider range of potential high caliber investors), I would actually go the Note route. So, I have outed myself as a Convertible Note guy, which may be heresy these days, but I will lay both out in detail, as well as why someone would think my position wrong, as this one is a close call. In the end, any early money is good money!

See also: 4.103: Angels and Early Investors

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