Investors are understandably nervous about buying equity in start-ups that don’t have an established track record of success along with data that reliably evidences predictable growth into the future.
That makes it much harder to get investment for your early-stage start-up.
One of the key challenges in early-stage investing is that the future-value of a business can’t be reliably calculated. The answer to the question “what’s the value of your business” is “It’s anybody’s guess”. So, how do you arrive at a fair deal?
And that is why both SAFE notes and convertible notes have become popular investment options for startups. While convertible notes have been used for decades, SAFE notes have become increasingly popular in recent years, particularly among Silicon Valley investors. Both types of notes are agreements that convert into shares of preferred stock at the end of a financing round or other triggering event.
SAFE stands for Simple Agreement for Future Equity
Some advantages of using SAFE notes include:
– Simpler conversion event compared to convertible notes
– Incentive for investors to use them since they can convert into preferred stock
However, there are also some drawbacks to using SAFE notes, such as:
– Risk for investors since they are not loans
– Not as commonly used as convertible notes, so it may be difficult to find investors.
Convertible notes, on the other hand, have the advantage of generating revenue in the form of interest payments, which is one of the advantages over SAFE notes. However, they also come with some drawbacks, such as the risk that lenders may not recoup their initial investment if the company dissolves and doesn’t have enough money left over to repay the debt.
Overall, both SAFE notes and convertible notes are appropriate for young startups that need to raise money but aren’t ready for a valuation. The right option comes down to the method that works for the startup and its potential investors.
Contact us to find out how we can help bring your venture to life.
