SAFE's were created by Y-Combinator to help mitigate some of the burden on founders and investors that comes with convertible notes (interest and legal implications of debt). SEC.gov | Investor Bulletin: Be Cautious of SAFEs in ... The dilution math is deferred until the Series A. The User Guide on the Y combinator website notes that when SAFEs were first introduced, startups and investors were primarily using convertible notes for early-stage fundraising and the original SAFE was intended to be a replacement for those convertible notes. They cannot be unilaterally "cancelled" any more than a company can decide to cancel your share ownership, and neither the safe note, nor a typical convertible note, contains a company-side redemption r. The Differences Between SAFE And Convertible Notes? SAFE Notes vs. Convertible Notes [Entrepreneurs Taking ... Why Convertible Notes and SAFEs are Extra Dilutive ... Share on email. The Safe User Guide explains how the safe converts, with sample calculations, an explanation of the pro rata side letter, and suggestions for best use. It often comes in the form of an offer by an investor who missed the last round and doesn't want to miss the next round. Simplicity: SAFE notes are simpler than convertible notes, with no maturity date and interest rate. Like a convertible note, a SAFE has the potential to convert into equity in the future. To put it in other terms, a convertible note is debt, while a SAFE is a convertible security. Convertible debt was widely used at that time, but SAFEs are typically a lower-cost . This document was authored by Y Combinator lawyer Carolynn Levy and open sourced. Before SAFEs, convertible notes were the default early-stage investment vehicle: angel groups and seed funds relied on convertible notes to avoid the cost and complexity of executing a preferred stock round while still providing themselves the benefits of equity ownership in the future. Convertible notes are conceptually simple, yet they have quite a bit of subtle detail in their structure. There is a trade . 5. (More on that shortly.) The general premise behind a convertible note is that you will issue some dollar value of equity in the startup later in time, as repayment for the . SAFE or simple agreement for future equity works as a warrant since it's an option to purchase equity later based on the terms the agreement defined. SAFEs were touted as superior because, since they are not debt (at least according to certain folks), they do not need to have things such as an interest rate and maturity date. (Share price, converted shares and Ownership percentage will populate automatically when the model runs calculations.) On the flip side, a SAFE is a 5-7 page document that was created to streamline the seed investment process. Convertible Note is a debt instrument that the investors can use later on to buy the equity of the company. Share on linkedin. With a SAFE note, the investor has the option of conversion to equity at the valuation cap or a 1x payout. Convertible notes became more wide-spread after the 2008 recession and will likely be seen more and more as COVID 19 continues to impact the economy. This would generally lead you to Accounting Standards Codification ("ASC") 480-10-14 which talks about a variable number of shares for a fixed or predominately fixed monetary amount. A SAFE is basically a convertible note that, in an attempt to simplify, has eliminated the interest and maturity components. this SAFE is intended to be used when a company is raising seed capital from a third party investor in the form of a convertible instrument. If a startup raises money at a higher company valuation than the valuation cap, then the SAFE or convertible note will convert into shares at the lower valuation cap. SAFEs. Principal: The amount of cash that the stakeholder paid for the note. Answer: Safe notes, like convertible notes, are securities instruments embodied in a contract. Simple. To issue a convertible note, you will first have to draft the agreement and consult with a lawyer. SAFEs, or Simple Agreements for Future Equity, which were introduced by Y-Combinator in 2013, are a popular investment instrument in early-stage startup financings. SAFEs are an increasingly familiar way of structuring a company's initial . To put it simply, SAFE is a warrant to purchase a stock at a later priced round, and hence is basically a contract. These notes are issued in the initial stages of a company. There is no interest or set maturity date of a SAFE note. This simplifies things for both the . With a SAFE, the sole value to the investor is the company's shares which the investor receives when the invested cash converts upon a particular event. Both sets of model documents are freely downloadable on the internet. Because of this, convertible notes usually have a maturity rate and an interest rate. A SAFE and convertible note both allow for conversion into equity. Like the SAFE note, convertible notes are used to promise investors that they will receive additional shares in the future. Because simplicity is one of its primary goals, SAFE offers a straightforward option. The SAFE is a simplified version of the convertible note and removes the loan and maturity date altogether. You've heard of some of the virtues of SAFEs and convertible notes, including eliminating the need to set a valuation (see our Convertible Debt Primer).While in days of yore it was basically the case that SAFEs and convertible notes had no discernible link to any particular valuation, those days have passed. share: Share on facebook. The simple agreement for future equity (SAFE) is a common equity funding document used by startups and investors in seed-stage funding deals. Conversion Discount: The discount applied to the price per share when the note holder will purchase shares in the next fundraising round. SAFE converts only when you raise any amount of equity investment unlike convertible notes which trigger only when a "qualifying . OK, now we do a $1.5 million convertible note or SAFE with a valuation cap of $6 million. A SAFE note (simple agreement for future equity) is a convertible security that acts like a warrant which allows the investor to buy shares in a future priced round. A convertible note is a promissory note that is convertible into stock. It acts as an IOU. But are convertible notes always the best options for companies? SAFEs, or simple agreements for future equity, were introduced by Y Combinator in late 2013 as a replacement for convertible debt.They are a popular way for early-stage start-ups to raise capital and are often preferred over convertible debt because they bear no interest, have no maturity date, and convert into equity only if certain predetermined criteria are met. So there is no need to fix a term or decide on an interest rate. But what the investor buys is not debt, but something more like a warrant. They defer a lot of the . SAFE convertible note . The main difference SAFE differs from convertible notes are maturity date . SAFEs, in contrast, are just five pages long and typically never modified, thus helping founders close deals faster. Input the Principal + assumed interest to be accrued, Valuation Cap, and Discount. SAFE Notes vs. Convertible Notes: SAFE Notes Are Better . Select the Safe type (pre-money or post-money). On the other hand, convertible notes allow for conversion into the current round of shares or a future financing event where . The SAFE creates an alternative . Mechanically, a convertible note represents an exchange of an investor's money for a convertible debt instrument that will allow the investor to make a modest amount of interest until . The note specifies when and on what terms the note converts into stock. SAFE notes give investors the option to convert their SAFE notes to equity at the valuation cap or a 1x payout. SAFE notes are not debt; they're convertible equity. A SAFE note, unlike a convertible note, is a simple written agreement between an early stage startup founder or co-founder and investor which provides for the convertible debt into priced equity. SAFE notes are simpler than convertible notes and come in many variations with respect to having a Valuation Cap or discount. Same numbers as the above seed round, except it's structured as a convertible security instead of an equity round. This Note assumes that the company raising capital is a startup organized as a Delaware C-corporation.However, each of these instruments may be adapted for use by a limited liability company.This Note also assumes that all of the instruments discussed . The shadow preferred stock is a rational approach and solution to one particular asymmetry that would otherwise result if the SAFE converted into the new investor preferred stock—the liquidation preference premium. Your company becomes a debtor to the investor until the conversion is made, so lawyers prefer them. In late 2013, the Y combinator introduced the original SAFE. There are two common types of convertible instruments: notes and SAFEs. Both SAFEs and convertible notes convert into equity in a future priced equity round; a convertible note may have more complexity to when/if/how it . The big differences between these two financing options, however, include no maturity date or interest with the SAFE—which means no repayment from . Like a convertible note, a SAFE converts during an equity round—specifically, the next funding round. Also, convertible notes typically trigger only when a . Alternatively, convertible notes, despite being a little bit heavier to implement, introduce a safe controlled environment particularly appreciated by early stage start-ups. Convertible Notes: The Basics. Our SAFE and convertible note calculator will help you understand the potential dilutive impact of pre-money SAFEs, post-money SAFEs (aka YC SAFEs), and notes once they convert in a future priced round. SAFE stands for Simple Agreement for Future Equity. Thus, this is a convertible note where the price is exactly $10M regardless of next round valuation) There's no big difference in this case. A few years back, it seemed like there were 10,000 articles on the pros and cons of raising relatively modest amounts of capital using traditional equity vs. SAFEs and convertible notes. The "Simple Agreement for Future Equity" (SAFE) has recently become popular for early stage companies. In 2013, Y Combinator created SAFE notes to simplify the process. In another example, if a SAFE specifically triggers upon an offering of preferred stock, but the company subsequently raises money by instead selling more SAFEs, common stock or convertible notes, or by getting a conventional bank loan, then the SAFE will not convert despite the company having raised more capital. Both SAFE and convertible notes have exit clauses that address what needs to be done when, for example, there is a change of ownership before conversion. SAFE's provide the company with an obligation to deliver a variable number of shares based on a future unknown priced round (discounted) or a valuation cap. The price per share for the convertible note or SAFE would then be calculated as 0.75 x $1 = $0.75. While the safe may not be suitable for all financing situations, the terms are intended to be balanced, taking into account both the startup's and the investors' interests. the convertible note (KISS terms) is also intended to be used when a company is raising . SAFE Notes vs. Convertible Notes: SAFE Notes Are Better . This Practice Note explains the main features of convertible notes and the simple agreement for future equity (SAFE) used in seed financings. SAFE or convertible promissory note — a comparison. SAFE Notes vs. Convertible Notes [Entrepreneurs Taking Charge] 2016-10-18 in Advice by Charles F. McCormick. The terms of the SAFE are company friendly and are based on Y-Combinator's template agreement of the same name. Simply put, both mechanisms play on the same tools but articulating them differently as to emphasize - and ensure - opposing aspects of a seed financing operation. A convertible note should be classified as a Long Term Liability that then converts to Equity as stipulated from the contract (usually a new fundraising round). SAFE was introduced by the Silicon Valley accelerator Y Combinator as the new big boy in town for startups to have more options, or even to replace convertible notes when it comes to raising capital. It is a straightforward five-page document that can be understood easily without the need of a lawyer. Difference between SAFE and Convertible Notes There are also many mo. While convertible note is a debt, a SAFE note is not debt: a convertible note includes an interest rate and maturity rate, a SAFE note doesn't. Both SAFEs and convertible notes convert into equity in a future priced equity round; a convertible note may have more complexity to when/if/how it converts. In the earliest stage of a company — when . The safe is a popular fundraising instrument developed by Y Combinator that resembles a convertible note, but does not have an interest rate or a maturity date. what this is. Purely from the perspective of founders, it is a fantastic deal. Applies to these Convertible types: Convertible debt, Convertible security, and SAFE. It was created and published as a simple replacement for convertible notes. Less to negotiate: SAFE notes do not need a lot of negotiations like other investments. Equity conversion for Pre-SAFE notes are calculated based on the outstanding shares pre-money of the notes, while Post-SAFE notes equity conversion happens post money of all . A SAFE is a simpler form of Convertible Note with several key differences; A SAFE is a convertible security, rather than a debt instrument; There is no Maturity Date; There is no interest rate; As a result of the reduced number of provisions, SAFEs are cheaper and simpler to transact than Convertible Notes. The Ins and Outs of Convertible Notes. SAFE holders also lose certain benefits that might be gained from working through a convertible note funding round. In practice a SAFE enables a startup company and an investor to accomplish the same general goal as a convertible note, though a SAFE is not a debt instrument. We often hear a convertible note (or SAFE) is the best fundraising strategy for your seed round because it can help defray a low valuation. For example, depending on whether a company is raising a priced round (i.e., selling equity at a fixed valuation) or a convertible security round (i.e., a Safe or convertible note), each triggers different regulatory reporting and/or approval processes. The key difference is that SAFEs only allow for conversion into the next round of preferred stock issued by a company in the next priced financing round. SAFE stands for "simple agreement for future equity" and it is still most popular in California. 1. Convertible Notes. A convertible note is debt, while a SAFE is a convertible security that is not debt. However, convertible Notes are generaly favored by investors over SAFE. The primary goal of the cannabis Safe is to address the regulatory complexities that come with raising money in the industry. Initially made available by Y Combinator (YC) in 2013 and subsequently updated in late 2018, the SAFE investment instrument was intended to improve on the highly popular convertible note used by startups during the seed stage or as a short-term bridge between equity funding rounds. SAFE stands for Simple Agreement for Future Equity. Depending on your negotiating skills and your company's traction, you can get a SAFE or convertible note without a valuation cap. The general premise behind a convertible note is that you will issue some dollar value of equity in the startup later in time, as repayment for the . SAFEs (SAFE is an acronym that stands for "simple agreement for future equity") were created by Y Combinator in 2013 as an alternative to convertible notes. A SAFE note (simple agreement for future equity) is a convertible security that acts like a warrant which allows the investor to buy shares in a future priced round. 0 0 0 0 0. In 2013, Y Combinator pioneered SAFEs as a convertible debt alternative. While convertible note is a debt, a SAFE note is not debt so while a convertible note includes an interest rate and maturity rate, a SAFE note doesn't. Both SAFEs and convertible notes convert . Though convertible notes are a bit more complex, both SAFE and convertible . Convertible notes have better liquidation preferences terms. Y-Combinator intended for SAFEs to be a simple investment instrument requiring minimum negotiation. You can set up your model in seconds and run as many scenarios as you'd like—all you need are a few inputs: From there, the calculator will . A trend we've seen in the financing of startups in the last five years is the "SAFE between rounds" which means raising a convertible note (or SAFE) to provide more capital and runway in between financing rounds. Two such options are a convertible promissory note and a simple agreement for future equity (SAFEs). Y Combinator Introduces Safe, Its Alternative To Convertible Notes. Model your SAFE funding round with our free calculator: http://safes.carta.com Watch episode 1, the difference between SAFEs and Convertible Notes: https:. However, from a tax perspective, the treatment of SAFEs is not so simple. In analyzing STI's note to B, the tax practitioner confirmed that the note is not convertible into STI stock and verified that the other straight debt safeharbor requirements are met. As a result, a convertible note includes an interest rate and maturity rate, while a SAFE does not. Though the additional negotiation involved with convertible notes is more complicated from a company's perspective, investors can find comfort in the process, which might lead to more investors, or larger investments, at the . Input the Principal, Valuation Cap, and Discount. The primary goal of the cannabis Safe is to address the regulatory complexities that come with raising money in the industry. Y Combinator created the SAFE (Simple Agreement for Future Equity) a few years ago as an "upgrade" on convertible notes. SAFE notes and convertible notes can both offer a discount on an upcoming round (or a current round in the case of convertible notes). For example, if a company raises a Series A financing at a $10 million pre-money valuation but an investor has a $5 million valuation cap on a convertible note, then the . Pre-SAFE notes were originally created by Y-Combinator in 2013 to replace convertible notes by simplifying things. Convertible securities (convertible notes and SAFEs) are often favored, particularly for smaller rounds (less than $2 million), for their simplicity and speed to close. For example, if the stakeholder invested $10,000, then $10,000 is the principal amount. Years ago, Y Combinator helped popularize the convertible note as a way for startups that go through its accelerator to easily . For example, depending on whether a company is raising a priced round (i.e., selling equity at a fixed valuation) or a convertible security round (i.e., a Safe or convertible note), each triggers different regulatory reporting and/or approval processes. The SAFE was created by the Y Combinator, a famous tech accelerator located in Silicon Valley, California. Both SAFE and convertible notes allow for a conversion into equity. Most SAFE agreements convert into preferred stock. Answer (1 of 2): Safe notes and convertible notes seem similar from the entrepreneur's point of view. SAFE. It is a short-term debt financing instrument. SAFEs convert into stock in a future priced round. A SAFE is simpler and shorter than most convertible notes. The main difference SAFE differs from convertible notes are maturity date . A SAFE or safe stands for a "simple agreement for future equity". SAFE. A safe can have a valuation cap, or be uncapped, just like a note. Note that in this scenario price per share for the convertible note or SAFE using the valuation cap would end up being greater than that which would result by applying the discount rate (remember that the discount rate would be the traditional . A brief refresher on the economics of convertible notes helps illustrate the liquidation preference premium dilemma that SAFEs . This note is a convertible instrument that is intended to be used to document a seed investment from a third-party investor or a bridge financing from existing shareholders. However, while notes convert into equity when your company raises a specific amount of money, SAFEs simply convert into equity during the next priced round. SAFE Notes vs. Convertible Notes SAFE notes are a type of convertible security, while convertible notes are a form of debt that can convert into equity once certain milestones are met. Convertible Notes: The Basics. 5 A convertible note is a debt instrument, with interest . Even though they may not have the reputation, SAFEs (Simple Agreement for Future Equity) should be of interest to both startups and entrepreneurs. Often a standard convertible note or SAFE will contain a "valuation cap." If there is a valuation cap, there is a chance your convertible note or SAFE could convert into equity, such as Series Seed Preferred Stock, at such valuation cap (rather than at some discount of the price the other purchasers in . SAFE notes are simpler than convertible notes and come in many variations with respect to having a Valuation Cap or discount. SAFE doesn't carry an interest rate, but convertible notes do . However, convertible notes can be confusing and complicated. Both SAFE notes and convertible notes have provisions that address payouts when a company experiences a change in control, such as a buyout or IPO, before conversion. I shared my detailed learnings here, and I think it remains a strong analysis of the pros and cons of each way to raise money, and what really matters: Convertible notes are a debt, allowing companies to get the funding they need without selling shares at a fixed valuation, since it may be unknown at the time. You're a founder who wants to get things moving, but you need some funds. This agreement is then sent for review to the investor. Share on twitter. The SAFE convertible instrument, or Simple Agreement for Future Equity, was developed by the startup accelerator Y Combinator. The difference here is that while a convertible note can allow for the conversion into the current round of stock or a future financing event, a SAFE only allows for a conversion into the next round of financing. The KISS convertible notes, or Keep It Simple Security, was developed by startup accelerator 500 Startups. It is a well-drafted document, but when you get down to brass tacks, a SAFE is basically a convertible note without interest or a maturity date. Therefore, the note meets the statutory criteria for safe-harbor debt. Difference between a SAFE, Convertible Note, & Equity Financing. A safe is like a convertible note in that the investor buys not stock itself but the right to buy stock in an equity round when it occurs. SAFE vs. Convertible Promissory Note. As pointed out in the definition, convertible notes can be intricate and lengthy. A convertible note is debt, which means it will accrue interest rates like a loan, and needs to be repaid should the note reach its maturity date. SAFE was introduced by the Silicon Valley accelerator Y Combinator as the new big boy in town for startups to have more options, or even to replace convertible notes when it comes to raising capital. Convertible notes are conceptually simple, yet they have quite a bit of subtle detail in their structure. As interest in emerging companies continues to rise, especially in up-and-coming tech companies, entrepreneurs and investors are coming up with new ways to structure their investments. However, convertible notes are more like a form of short-term debt, with the investor loaning money to the company, including interest, with an option for equity at the next funding round. If you're raising seed financing for your startup, chances are you're considering fundraising on a convertible instrument like a SAFE (Simple Agreement for F. Just like Convertible Notes, SAFE agreements can have valuation caps and discounts. So again, SAFE is simpler. Word version PDF version. At times, valuation caps are talked about, but that is all. Because these are notes or SAFEs, there's no dilution registered yet on the cap table. Issue $100k on a YC-SAFE note at $10M price (in this particular SAFE the cap of $10M is the conversion price and even if the future equity round happens at a valuation less than $10M, the note will still convert at $10M. Safe Notes: Why You Should Have One. A convertible note is debt that can convert into equity upon a future qualifying event or transaction, like a priced equity round of $1 million or more. A convertible note can allow for the conversion into the current round of stock or a future financing event, a SAFE only allows for a conversion into the next round of financing. The SAFE is similar to a convertible note in the sense that it's a financing instrument with the potential to convert to equity in the future at an identified milestone (i.e. a funding round). To put it simply, SAFE is a warrant to purchase a stock at a later priced round, and hence is basically a contract.