SAFEs and convertible debt financings broadly accomplish the same goals for early-stage (and even later-stage) emerging companies. The legal and negotiation costs of these instruments are typically an order of magnitude less than a traditional “equity” financing (Series Seed, Series A-Z, etc.), and for the most part they defer awkward, impractical or even impossible conversations about such issues as valuation, board seats, protective provisions, anti-dilution protections, rights of first refusal and co-sale, information and inspection rights to a later time.
Their general user-friendliness can be a double-edged sword, however, because without the advice of counsel, they can quickly get out of control, become hard to track, and prohibit or significantly hamper the Series Seed/Series A equity financing that they were initially meant to bridge toward.
But those are their similarities; this tip is about why two distinct forms of convertible securities exist in the first place if they are meant to accomplish the same overall goals.
1 (and 2). Interest and Maturity
SAFEs (SAFE is an acronym that stands for “simple agreement for future equity”) were created by Y Combinator in 2013 as an alternative to convertible notes. SAFEs were touted as superior because, since they are not debt (at least according to certain folks), they do not need to have things such as an interest rate and maturity date.
Convertible notes do have interest rates and maturity dates, but a properly structured convertible note round will have the notes become “demand” notes after maturity at the “demand” of the holders of the majority of the outstanding balance of all the relevant notes. And because most pre-equity investors tend to be friends, family or risk-tolerant angel investors, the maturity date is not as much of a doomsday clock as it may initially appear (of course, there are exceptions).
Similarly, any interest rate may seem objectively worse than not having an interest rate, but some investors may need to see some sort of interest, even if the rate is largely nominal, to justify their investment.
3. Structure
SAFEs are typically “stand-alone” but part of a “series” of otherwise identical SAFEs purchased by other investors at different times and for different amounts.
Convertible notes may be stand-alone or structured as a “series” of identical convertible notes, as SAFEs typically are, but the better and more typical structure is a singular parent “Note Purchase Agreement” (NPA) that contains most of the substantive terms of the financing and short “Demand Promissory Notes” issued to each investor as evidence of the date and amount of that investor’s investment.
A single governing NPA prevents accidentally issuing instruments with different discounts, valuation caps or other rights, because all of those terms are just housed in one agreement applicable to all investors (and yes, “SAFE Purchase Agreements” are possible, but they are not the norm).
4. Investor Familiarity/Tolerance
If an investor is willing to invest via a SAFE, the investor is almost certainly familiar and comfortable with a convertible debt financing. Conversely (especially outside Silicon Valley), if an investor is willing to invest in a convertible debt financing, it is not certain that the investor is comfortable or familiar with a SAFE. Accordingly, during a SAFE financing, a company may come across a potential material investor who will invest only through convertible debt.
5. Flexibility
SAFEs, because of their recency and the way they were introduced, are relatively standardized. Convertible notes/NPAs come in a much wider variety of formats. Both standardization and the availability of different formats can be good or bad. For SAFEs, certain terms (such as the “Pro Rata Rights Agreement” language, which requires that the SAFE holder be granted pro rata participation rights in future equity financings after they convert into equity) are investor-friendly and hard to remove since a savvy investor will compare a customized SAFE against the publicly available Y Combinator form. No centralized institution has issued a generally accepted model “form” of an NPA/convertible note financing, so if a potential investor (incorrectly) insists that it’s normal for a convertible debt financing to be secured by using the company’s assets as collateral, it is more difficult to point to a generally accepted standard to prove them wrong.
To wrap this up, the choice of whether to go with a SAFE financing or a convertible note financing is important, but only in the details. It is much more important to follow basic capitalization table principles (the ratio of the amount to be raised to the valuation cap, if any, for example). But understanding the pros and cons of each of the two most common types of convertible financings will help you understand why both continue to be commonly used.

Building Your Personal Brand: Top 10 Takeaways
In celebration of Women’s Entrepreneurship Day, Valeska Pederson Hintz and Wendy Moore of Perkins Coie hosted a fireside chat with Elisa Schreiber and Priya Cherian Huskins on the theme of “Command Your Narrative: Building a Resilient Personal Brand for Women Entrepreneurs.” Elisa, a partner at Greylock and […]

Fundraising Without General Solicitation
When you’re building the next big thing in the startup world, it’s easy to overlook some crucial regulatory requirements in your quest for success—especially when it comes to fundraising. Securities laws (which apply to any fundraising) tend to be an afterthought for many founders, but this oversight […]

Rise in Popularity of AI Transcription Services Brings Litigation and Disclosure Risks
The increasing use of artificial intelligence (AI) transcription and note-taking services in virtual meetings allows participants to focus on discussions without the distraction of taking notes. But this convenience comes with novel litigation and disclosure risks that businesses must assess and manage as they roll out these […]