What's the difference between a SAFE and a Convertible Note?
What are the advantages of a SAFE?
What are the disadvantages of a SAFE?
A SAFE is a Simple Agreement for Future Equity. It is an investment contract between an investor and a company that gives the investor the right to purchase equity in the company at a later date, usually when the company raises additional funding at a higher valuation.
SAFEs were created by Y Combinator, a startup accelerator, as an alternative to convertible notes. Convertible notes are debt instruments that convert into equity at a later date, typically when the company raises additional funding.
The main difference between SAFEs and convertible notes is that with SAFEs, there is no interest accrual or maturity date like there is with convertible notes.
One of the main advantages of SAFEs is that they are simpler and faster to close than convertible notes. This is because there is no need to negotiate terms such as interest rate, maturity date, and conversion price. This can save time and money for both the investor and the company.
Another advantage of SAFEs is that they are less dilutive than convertible notes. This is because with SAFEs, investors do not receive any preference or discount on the price per share when they convert their investment into equity. This can be beneficial for the company because it means that more equity will be available for future rounds of funding.
One of the main disadvantages of SAFEs is that they may not be suitable for all investors. For example, angels and other early-stage investors may prefer convertible notes because they offer more protection in case the company does not raise additional funding or fails entirely. In contrast, venture capitalists and other later-stage investors may prefer SAFEs because they are less dilutive.
Another disadvantage of SAFEs is that they may not be suitable for all companies. For example, companies that are not able to raise additional funding or achieve a higher valuation may not be able to offer investors any equity when they convert their investment into equity. This could lead to investors being unhappy with their investment and may deter future investment in the company.
SAFEs are a type of investment contract that gives investors the right to purchase equity in a company at a later date, usually when the company raises additional funding at a higher valuation. They were created by Y Combinator as an alternative to convertible notes. The main difference between SAFEs and convertible notes is that with SAFEs, there is no interest accrual or maturity date like there is with convertible notes.
