While both instruments have some similar characteristics, convertible notes have a long history and consist of debt terms generally understood by a broad audience. On the other hand, SAFEs have some unique features, typically requiring a more in-depth discussion. Below we discuss those features. In future articles, we will discuss the key elements of convertible notes and compare the two more in-depth.
SAFEs are convertible instruments that, similar to convertible notes, will convert the holder’s investment amount into equity of the issuing company upon the occurrence of a triggering event. One key feature shared between convertible notes and SAFEs that make them attractive to early-stage founders is their ability to provide a method of fundraising without the burden of attempting to value a company in its infancy.
Conceptually, by removing the interest rate and maturity dates, SAFEs were created to establish a more streamlined and cost-efficient fundraising method over convertible notes. While such terms are critical aspects of traditional debt instruments, return of principal plus interest accrual is not a vital goal of the high-risk, high-return early-stage investment thesis.
While SAFEs have been around since Y Combinator released them in 2013, widespread use arose in 2018-2019. The original SAFE formulation was a “pre-money” SAFE, but the most popular version today is the “post-money” SAFE. Therefore, we focus on the “post-money” SAFE in this article. However, for background, the key difference between the two is the point at which the equity conversion is determined.
Key Features of “Post-Money” SAFEs
If a SAFE has both a discount and valuation cap, then the SAFE converts under the term that gives the investor the greatest discount to the new equity round price. Investors are not entitled to take advantage of the discount and valuation cap (i.e., no double-dipping).
This article contained a summary of the key features of the “post-money” SAFE. While these instruments are designed for fast and cost-efficient investments, they are not suitable for every company, investor or deal. In addition, there are additional considerations in using SAFEs that are beyond the scope of this article.
Author Jason Acevedo is a partner in the Venture Capital & Emerging Growth practice group in the Corporate and Securities Department at Klehr Harrison.
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