When the next financing cycle is completed, the convertible loan and its attached debt will be converted into preferred shares. Convertible notes are very similar to SAFE notes, but are distinguished by this: SAFE is all-capital because it is an acronym that means « simple agreement for future capital ». « Simple » is a relative term that means « simple if you are a lawyer, » but a SAFE note generally has fewer pages, fewer clauses and is easier to understand. In short, convertible bonds are loan contracts that, at some point, will be remunerated and converted into equity at some point, and SAFS are contracts that give investors the right to acquire shares up to the amount of their investment if a new financing cycle takes place. Some SAFE notes are also accompanied by a pro-rata subsidiary letter, which contains more in-depth legal provisions. 3) The due date may be accompanied by clear transformation provisions. B, such as converting equity into shares or repaying the principal loan and interest. While the due date locks the founder into a conversion plan, they have more options on how this conversion is handled. The SAFes and the financing of convertible debt generally achieve the same objectives for emerging start-up companies (and even in the later phase). The legal and negotiating costs of these instruments are generally lower than those of traditional « equity financing » (Seed series, A-Z Series, etc.) and for the most part delay unpleasant, inconclusive, if not impossible discussions on topics such as evaluation, board seats, guarantees, anti-dilution protection, pre-purchase and co-sale rights.
, information and inspection rights at a later date. 5) No interest payments, which means that founders can get the same amount of investment as they would with a convertible loan, but with a lower payment. « We have observed that many founders do not do the basic dilution mathematics that is related to what happens with their chart (especially their personal holdings) when these grades are actually converted into equity. By launching the valuation, often several times, entrepreneurs end up having less equity in their business than they thought. And if a series of actions is inevitably included, entrepreneurs don`t like the founder`s dilution figures at all. A convertible bond (« Con Note » if you`re cool) is easier than a price exchange, especially because it delays the need to agree before investing on a pre-money valuation of the company. Instead of the startup that offers shares to investors, it offers a convertible loan, which is a loan to the company. One way to ensure that founders and investors truly understand the impact of issuing SAFEs and convertible bonds is to get your lawyers to build a pro forma capitalization table in advance. This table should clearly show the impact of these notes (including discounts or valuation limits) on the percentage of holdings between founders and investors after the equity conversion – the post-money position. Because of the multiplier effect of SAFes and banknotes, it is important to understand the concept of pre- and post-money valuations. Depending on your trading skills and your company`s traction, you will receive a SAFE or convertible rating with no valuation cap. However, it is quite difficult to do in this environment with both instruments, so there is no clear winner for seed investment in this category.
But Andrew Krowne of Dolby Family Ventures cautiously expressed caution in a July 2017 TechCrunch article: The company receives cash from the lender in return for a promise to repay the interest-plus amount on the due date.