Written by: Dan Dragicevich
The venture capital industry can be a bit of a wild ride. From navigating term sheets to deciphering cap tables, there’s no shortage of complexities to contend with. To make things even more difficult, there’s a whole book of industry terminology that founders must be familiar with to make the right decisions for their business.
Let’s take a look at two common VC terms and understand their similarities and differences: Simple Agreements for Future Equity (SAFEs) and convertible notes. Please keep in mind that this is a headline overview of each instrument and it’s important to do your own research.
Before diving into their unique structures, it’s important to understand how they should be used within startup financing. These two instruments are particularly valuable for businesses at early stages of development, offering an alternative avenue for raising capital when pursuing a priced round may not be feasible or needed. Simply put, if you are looking to hang onto your equity a little longer, these are excellent choices!
A SAFE is a promise of future equity in the company, with or without setting a specific valuation at the time of investment. This simplicity makes SAFEs a popular choice for founders who prioritize speed and flexibility in fundraising. In 2013, YCominbator developed the SAFE and they have since become the industry standard. Check out this page for more info!
On the other hand, convertible notes operate as debt that converts into equity at a later date, typically during a future financing round. While convertible notes offer more structure and protection for investors, they also come with interest rates, maturity dates, and valuation caps, adding complexity to the investment terms.
If you’re a founder struggling to decide which option is right for you, remember that it ultimately depends on your priorities and the preferences of your investors. Having said that, if an investor is allowing you to choose the investment vehicle, I would highly recommend going with a SAFE because of its simplicity, speed, and lack of back-and-forth negotiation.
Regardless of which option is ultimately chosen, it’s important to understand the nuances of each instrument and how they align with your startup’s goals and fundraising strategy.
So buckle up, fellow founders, and get ready for the wild ride ahead!
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