Both convertible debt and SAFEs are a commonly used tool to raise capital now, that will eventually convert into equity at a later point in time. Both Convertible Debt (aka. Convertible Note) and a SAFE - an acronym for ‘simple agreement for future equity - are types of debt instruments that have the right to convert into equity when a predetermined milestone is hit. SAFE is a term coined by Y combinator in late 2013, used by the majority of YC companies and further adopted by the broader startup ecosystem.
Learn more and download YC's template here
SAFEs are a widely used tool principally because they are a more straightforward convertible instrument. They are a convertible instrument like an option, warrant or convertible debt which allows the investor to buy shares in a future funding round. A key distinction that makes them more straightforward is that they always give the investor the right to purchase shares in the next priced equity round. Convertible notes, options and warrants can be structured to give the right to purchase shares in any future equity round. They can be structured with dizzying complexity, providing infinitely customizable terms. With a SAFE, the only term that really needs to be negotiated is a valuation cap. After that, the template can be downloaded from YC’s website and documented immediately.
