Convertible notes and SAFEs (Simple Agreements for Future Equity) are two common instruments used by startups to raise early-stage capital. While they share similarities, they also have distinct features that may make one more suitable than the other depending on the situation. Here’s a quick comparison to help understand the key differences and why a company or investor might choose each.

Convertible Notes

1. Structure: Convertible notes are debt instruments that convert into equity during a future financing round. They accrue interest and have a maturity date.
2. Valuation Cap and Discount: Convertible notes typically include a valuation cap (a maximum conversion price) and a discount rate (a lower price per share compared to new investors).
3. Interest and Maturity: Convertible notes are a type of loan, and they accrue interest over time, which is added to the principal amount upon conversion. They also have a maturity date, at which point the note must be repaid if not converted.
4. Flexibility, Legal Complexity: Convertible notes are slightly more complex due to their debt nature and the inclusion of interest and maturity terms. But, because their terms are not as standardized as SAFEs, they can be heavily customized.

SAFEs

1. Structure: SAFEs are equity instruments that convert into equity during a future financing round. They are not loans, and accordingly do not accrue interest or have a maturity date.
2. Valuation Cap or Discount: SAFEs also include a valuation cap or a discount rate, similar to convertible notes.
3. Simplicity and Speed: SAFEs are simpler and quicker to execute since they do not involve debt, interest, or maturity dates. Their terms are also very standardized. This makes them more founder-friendly and generally a good fit for the speed at which startups often move.
4. Financial Burden: SAFEs eliminate the pressure of repayment and interest accrual, allowing startups to focus on growth.

Conclusion

Both convertible notes and SAFEs offer valuable tools for early-stage fundraising, each with its own advantages. Startups and investors should consider their specific needs, preferences, and the context of the fundraising round to choose the instrument that best aligns with their goals.