Simple contracts with standard clauses so shouldn’t take long to negotiate Yes - holders will benefit from a valuation cap Usually but not always - there is an option to incorporate a valuation cap if agreed Yes - holders receive a pre-agreed discount when buying shares on conversion Usually but not always - there is an option to incorporate a discount rate if agreed Yes – usually 18-24 months - if the note is not converted to shares by the maturity date then either the loan has to be repaid in cash, an extension requested or an early conversion to shares may occur No - no maturity date or expiration date, so you can be relaxed about when you look for the next funding round (that would normally trigger the SAFE to vest) Yes - interest accrues but the interest is ‘paid’ in shares when the note converts This ensures that holders can hedge the amount they pay for their shares depending on the valuation of the company at the time of conversion. This is an upper limit on the valuation of the company at the time of conversion which translates into another discount for holders, if there is already an agreed discount rate on the shares.įor example, if the valuation cap is £1 million but the company is valued at £2 million, then investing £250,000 will mean the investor gains a 25% stake in the equity of the company. This may not be so advantageous if the company’s valuation is very high and in relation to the price offered to future investors, so often an investor will insist on a valuation cap. The company receives cash from the investor in return for a promise to repay that amount plus interest at the maturity date. What is a convertible note?Ī convertible note is a company loan which accrues interest but the debt (the loan amount plus interest) is intended to convert to shares upon an agreed event (such as a financing round) rather than being repaid. They were created as a simple alternative to convertible notes in order to standardise and simplify the seed funding process. SAFE notes were created in 2013 by an organisation in the US called Y Combinator, which provides seed funding, mentorship, and resources to start-up companies. They are considered more founder-friendly than convertible notes as they do not have to be repaid if the venture is unsuccessful. They can remain in place indefinitely, and investors don’t have any leverage over the way the company is run in the meantime.īecause SAFEs are relatively easy to draft and negotiate and you don’t need to pay interest on them, they are a flexible way to raise funds. SAFEs are a form of convertible security not debt, so they don’t attract interest or have a maturity date by which they are expected to be repaid. Other considerations when using SAFEs or convertible notesĪ simple agreement for future equity or SAFE is a financing agreement between the company and an investor which grants the investor the right to receive shares at a point in the future, based on the valuation of the company at that point (usually the next funding round, often series A).Converting to equity – pro forma to agree calculation methods.Advantages and disadvantages of SAFEs and convertible notes.Comparison of SAFEs vs convertible notes.
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