When startups are looking to raise funding, they have several options. Two popular ones are using a Simple Agreement for Future Equity (SAFE) or a Convertible Note. While both options have similarities, they are not the same thing. This article will explore the difference between a SAFE and Convertible Note.
A SAFE is an agreement between the investor and the startup company. The investor provides the company with funds in exchange for the right to convert that investment into equity at a later date. This means that the investor doesn't receive equity right away but rather receives the option to convert their investment into equity at a later time. This type of agreement is often used when the startup is in its early stages and hasn't established a valuation yet.
A Convertible Note, on the other hand, is a debt instrument that can be converted into equity. Essentially, the investor loans money to the startup, and the loan can later be converted into equity at a later date. Similar to a SAFE, a Convertible Note is often used in the early stages of a startup when the valuation is not yet clear.
Convertible Note Acts Like a Loan and Has Interest
So, what's the difference between the two? The main difference is that a SAFE is not a debt instrument, while a Convertible Note is. This means that a Convertible Note has a maturity date, while a SAFE does not. A Convertible Note also has a fixed interest rate, while a SAFE does not. In addition, a Convertible Note has a cap on the conversion price, while a SAFE does not. The conversion price is the price at which the debt instrument converts to equity.
Convertible Note Has Clear Equity Valuation
In a Convertible Note, the investor knows the exact amount they will receive if the debt converts to equity. With a SAFE, the conversion price is determined at a later date, and the investor may end up receiving less equity than they had anticipated.
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A SAFE and Convertible Note are both ways for startups to raise funds without establishing a valuation upfront. However, a SAFE is not a debt instrument, while a Convertible Note is. A Convertible Note has a maturity date and a fixed interest rate, while a SAFE does not. A Convertible Note also has a cap on the conversion price, while a SAFE does not. Ultimately, it's up to the startup and the investor to decide which option is best for them.
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