SAFE vs. Convertible Notes: Top 6 Differences

SAFE and convertible notes have become highly popular alternatives to equity for startups looking to raise pre-seed or seed funding. What’s best for your startup? To choose one or the other, you should first understand the differences between SAFE vs. convertible notes.

In this article we explain you the top 5 differences between SAFE and convertible notes so you can make the best decision for your startup.

Note: if you’re wondering what’s the difference between SAFE vs. KISS notes instead, have a read at our article here.

1. SAFE don’t have an interest rate

Unlike convertible notes, SAFE aren’t debt instruments.

This means 2 things: SAFE don’t have any interest rate nor a repayment date (aka maturity – see next section).

Convertible notes, in comparison, often have an interest date (in the 6 to 8% range). This interest accrues in time and is either converted into equity (when the notes convert), or repaid in cash at maturity (very rare).

Indeed, when the startup swaps the convertible note into equity at or before maturity, it does so with accruing interest. For example, a $100k convertible note with 10% annual accruing interest would be worth $110k in a year. Therefore, we would use $110k instead of the $100k to determine how many shares the investor should get.

Instead, SAFE notes don’t have any interest. This make SAFE notes more attractive from the standpoint of a startup (vs. investors). The ownership percentage they are owed (when SAFE notes convert into equity) doesn’t change in time with interest.

2. SAFE don’t have a maturity

As explained above, the 2nd main difference between SAFE and convertible notes is that SAFE don’t have any maturity.

Therefore, startups that raise SAFE don’t have an obligation to repay it in case it doesn’t convert to equity. Again, this makes SAFE more attractive for startups vs. convertible notes.

Theoretically, startups can sit on SAFE notes for a very long time. Unlike convertible notes that usually come with a 12-18 months maturity (sometimes 24 months), startups don’t have the pressure to raise a priced equity round in the short term.

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3. Convertible notes have multiple conversion events

Both SAFE and convertible notes are financial instruments designed to be converted to equity in the future. Yet, the events that may trigger a conversion differs from the two.

SAFE is more simple here: the only event that triggers a conversion is when the startup raises the next priced equity round. At that point only, the SAFE convert into preferred stock.

Note: for more information on the different instruments you may find in a startup cap table, see our article here (+ free cap table template)

Instead, convertible note are more broad when it comes to the types of events that trigger conversion. Convertible notes typically convert into equity (preferred stock) when:

  • A qualifying transaction occurs (such as a merger or acquisition)
  • A minimum amount is raised by the company (at the next priced equity round)

4. SAFE have a more flexible structure

SAFE notes are more flexible instruments.

Indeed, they are typically stand-alone agreements between a company and individual investors. As such, a startup can issue multiple SAFE notes with different terms (e.g. valuation cap, discount rate) to different investors.

Therefore, SAFE are very attractive for startups. It allows them to test and adapt to the market by issuing separate SAFE notes as investor interest increases. The more investor interest, the more favorable the terms are for the startup.

Instead, convertible notes are rather complex instruments, so they can’t be issued on a standalone basis. Indeed, factoring multiple convertible notes instruments for the purpose of updating a cap table would be very challenging.

That’s why convertible note are typically structured as a single legal document that spans all the convertible notes in the future. This document is called a Note Purchasing Agreement (NPA). Therefore, all convertible notes investors all share the same terms.

5. Convertible notes have better liquidation preferences terms

Both SAFE and convertible notes have exit clauses that address what needs to be done when, for example, there is a change of ownership before conversion.

SAFE notes give investors the option to convert their SAFE notes to equity at the valuation cap or a 1x payout.

Instead, convertible notes are more tailored and can include specific liquidation preferences clauses. For instance, convertible notes investors may chose to convert their equity at a 2x payout instead.

Note: for more information on liquidation preferences clauses, see our article on the 16 key terms to look out for in your term sheet.

6. SAFE are less common

Because SAFE are more recent (they were first introduced by Y Combinator in 2013), some investors aren’t yet used to them.

Also, as explained above, SAFE are generally more attractive for startups. This might lead some investors to push back and choose convertible notes instead.

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