Convertible Note vs SAFE

As a previous CEO of startup and early-stage companies, I have had to be very knowledgeable in the various equity instruments used to bring capital into my companies.  Although the convertible note has become the most widely used instrument in the startup/early-stage space, the SAFE agreement gets some consideration as well.  In speaking with a prospect of mine recently, we discussed the differences in the two options, so I thought it would be a great topic for today’s blog.

Let’s begin with the convertible note.  In simplest definition, it does exactly what the name implies – it is a short-term debt that converts into equity given a trigger, ie. some liquidity event like future funding.  The investor essentially “loans” the company money (based on a pre-money valuation) but instead of receiving P&I payments as would occur on a normal loan from a bank, the investor receives its return by receiving equity in the company (and sometimes interest). The SAFE (simple agreement- future equity) has similarities to the convertible note but the two distinct differences are that the SAFE is not debt, and typically the valuation doesn’t have to be determined upfront. The SAFE is more like a Warrant as it provides rights to the investor for future equity in the company, although the specific share price doesn’t need to be set.

There are other details such as caps, discounts, deferred equity, etc., but to cover all of these in this blog would be difficult.  The main thing for entrepreneurs whether they choose a convertible note or SAFE is to keep the cap table as updated and accurate as you do your P/L and balance sheet.  If not, you could find yourself owning less of your company than you anticipated.

If you are evaluating equity instruments to bring capital into your company and need some assistance, please reach out to me.