Today we’re talking about the differences between convertible notes and SAFEs. Although SAFEs are the common standard here in Silicon Valley, I do see plenty of convertible notes if companies are fundraising elsewhere.
Here are the 3 key differences, and why I always suggest using a SAFE, if the company is based in the USA.
1. No legal review.
The SAFE is a standard template most investors know well, downloadable from the Y-Combinator website. You agree on terms, fill in the blanks and you’re done — no legal costs.
2. No repayment.
Regardless of what happens with the company, a SAFE means the investor cannot force repayment. This prevents most bad behavior.
3. No maturity date or Interest.
Notes must be paid back or converted within 2 years and accrue equity-based interest for the investor. That means the company must either convert the note via a priced round, pay back the loan, or extend the note. I’ve seen note renegotiations become a big distraction and SAFEs avoid this problem.
Best of luck out there.
Sterling Road invests in idea stage and pre-seed B2B startups based in the US, Canada and UK.
