Convertible Note vs. SAFE Note
There are multiple differences between Convertible Notes and SAFE Notes:
- Debt Classification: Convertible Notes are debt, and SAFE Notes are not. Convertible Notes are loans that need to be repaid, either through cash or shares in the company. The goal is to be repaid in shares, in case the startup fails, the convertible Note needs to be repaid. The SAFE Note does not have a payback requirement.
- Timeline: SAFE Notes have no timeline and can be held in perpetuity if the company doesn’t continue to raise the company valuation and share price. Convertible Notes, being an official debt instrument, have maturity dates. After a set period of time (typically 18–24 months), the convertible Note will automatically convert to equity or must be repaid in cash.
- Interest/Coupon Payment: Like most debt securities, convertible Notes carry interest. The startup must pay back the principal plus interest, or if all goes well, allow the total amount to convert into equity. This interest kicker gives the investor a far greater share value than the original principal invested. A SAFE is not a real debt security so it does not carry interest. The investor has the discount and or valuation provisions as a return bonus but that requires the startup to perform as planned.
- Administration: SAFE Notes were created to be a simple one page document as a standardized term sheet with no surprises. Being that it is more of a promise than real debt security, the SAFE Note is very simple to draft following a template and off to the races.Convertible Notes tend to be longer and more complicated than SAFE Notes, with more terms, provisions, and contingencies. This extends the time it takes to close on investors and potential legal fees associated with the Note.