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SAFE vs. Convertible Note: What’s the Best for Seed-Stage Funding?
Convertible note or safe note? What's best for seed-stage funding?
What is a SAFE?
"SAFE" stands for "simple agreement for future equity." These convertible securities allow early-stage companies to raise capital without valuing the company Orr giving up equity up front. In these agreements, investors give the company cash in exchange for shares of equity in the future.
In 2013, Silicon Valley incubator Y Combinator developed SAFE, which can also be used to raise funds before a startup is ready for a valuation.
What is a convertible note?
An interest-bearing loan called a convertible note converts into preferred stock upon maturity or triggering event. In similar fashion to the SAFE agreement, convertible notes enable early-stage startups to raise money without immediately giving up equity or having a valuation.
Advantages and disadvantages of a SAFE vs. convertible notes
As seed funding tools, SAFE agreements and convertible notes are both useful; however, their structure makes each agreement distinct from the other, resulting in pros and cons that differ with each.
Hubspot's blog, The Hustle's article, "SAFE vs. Convertible Note: What's the Best for Seed-Stage Funding," breaks down SAFE and Convertible Notes and weighs the two. Since SAFE agreements do not carry interest, they are considered more founder-friendly while Convertible notes tend to be more investor-friendly due to their restrictions.