Fundraising · Startups

What is the difference between Convertible Notes and SAFE notes?

Pardeep Sumria Lovely Group

Last updated on March 13th, 2017

I had the opportunity to review today a very interesting blog post published by Fred Wilson (Union Square Ventures) where he makes some good points on the difference between these two debt instruments. You can see the blog post in detail here.

After reading his post I am a bit confused as he states that both methods are not really in the best interest of the founder. Do you agree with his perspective? What is the main differences that founders should take into consideration when looking at convertible notes and safe notes? Thanks so much!

Joan Heminway I am a business law professor and business lawyer

March 14th, 2017

SAFE instruments are not notes-; they're not debt instruments at all. The are contracts for future equity. More information can be obtained here. I do not know the post you are referencing, but founders can give up a lot of equity through either arrangement, and I presume that may be what the author is referring to that is not in the best interest of a founder. There is a SAFE Primer here. It may help answer your questions about differences. But other than the difference that the SAFE does not require repayment of the invested funds, the two financing instruments can be drafted with many of the same provisions.

Lance Cottrell Security Strategist, Advisor, Angel Investor, Product Evangelist, Chief Scientist at Ntrepid

March 13th, 2017

His suggestion to calculate what the cap table would look like post investment if it immediately converted at a range of prices is a good one. It makes it very clear how this would play out for all involved.