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October 30, 2023

3 Key Differences of Convertible Notes vs SAFEs

3 Key Differences of Convertible Notes vs SAFEs

Today we’re talking about the differences between convertible notes and SAFEs. Although SAFEs are the common standard here in Silicon Valley, I do see plenty of convertible notes if companies are fundraising elsewhere.

Here are the 3 key differences, and why I always suggest using a SAFE, if the company is based in the USA.

1. No legal review.

The SAFE is a standard template most investors know well, downloadable from the Y-Combinator website. You agree on terms, fill in the blanks and you’re done — no legal costs.

2. No repayment.

Regardless of what happens with the company, a SAFE means the investor cannot force repayment. This prevents most bad behavior.

3. No maturity date or Interest.

Notes must be paid back or converted within 2 years and accrue equity-based interest for the investor. That means the company must either convert the note via a priced round, pay back the loan, or extend the note. I’ve seen note renegotiations become a big distraction and SAFEs avoid this problem.

Best of luck out there.

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Ash Rust

Ash Rust

Managing Partner, Sterling Road

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