Is a SAFE a warrant?

Unlike a convertible note, a SAFE is not a loan; it is more like a warrant. In particular, there is no interest paid and no maturity date, and therefore SAFEs are not subject to the regulations that debt may be in many jurisdictions.

What is the difference between a convertible note and a traditional priced round from venture capital investors?

In a priced round, an investor knows exactly how much of a company they will own after investing. Convertible instruments defer a negotiation on price, and therefore ownership, to a subsequent round of financing past a threshold set in the term sheet.

Why are SAFE Notes bad?

Dilution and Overcrowding One of the most painful consequences of misusing or overusing SAFE notes is equity dilution. The more shares early investors agree to purchase, the less of your company you eventually own when the notes convert. That means less control over your organization’s future.

When do you use a SAFE note?

SAFE (or simple agreement for future equity) notes are documents that startups often use to help raise seed capital. Essentially, a SAFE note acts as a legally binding promise to allow an investor to purchase a specified number of shares for an agreed-upon price at some point in the future.

What happens to convertible note if startup fails?

When a startup fails, the company typically has run out of money. The owner of a convertible note may get nothing, or at best may only receive pennies on the dollar. You also may be able to write off your loss.

Is a SAFE a priced round?

SAFE stands for Simple Agreement for Future Equity. SAFEs convert into stock in a future priced round. They’re considered a type of warrant—not a debt—meaning they give investors certain equity rights.

Why convertible notes are safer than SAFEs?

The most significant difference is that SAFE notes prescribe a specific conversion method while convertible notes offer varying conversion terms. SAFE notes convert into the next round of preferred stock that the company issues in the subsequent priced financing round.

What is the difference between warrants and convertible securities?

Convertible securities are longer-term investments than warrants, and are usually issued as bonds or preferred stocks that investors can convert to a predetermined number of shares of the company’s common stock.

What is the difference between safesafe and convertible notes?

SAFE is considered to be the simpler version of the convertible note. However, this statement is just the tip of the iceberg. A thorough understanding is required to decide which option (Safe vs convertible note) would be more suitable to the needs of the company. What is SAFE?

Should you get a safe or convertible note for Your Startup?

Depending on your negotiating skills and your company’s traction, you can get a SAFE or convertible note without a valuation cap. However, it’s pretty tricky to do in this environment with either instrument, so there is no clear winner for seed investment in this category.

Is a series a or convertible note a better option?

Both act as a viable way to help startups overcome their current big hurdle in growing or scaling to reach the milestones that warrant a Series A round. Also, both options carry a discount on the next round (or current round for convertible notes), so neither presents a clear advantage.