some good advice
Announcing the SAFE, a Replacement for Convertible Notes
The safe (Simple Agreement for Future Equity) is intended to replace convertible notes in most cases, and addresses many of the problems with convertible notes while preserving their flexibility.
YC partner (and lawyer) Carolynn Levy has created a new alternative to convertible notes, called a safe, that has the advantages of convertible debt without some of the disadvantages.
The advantage of raising convertible debt is that it makes fundraising quicker. You don’t have to negotiate all the details you’d have to if you sold stock to an investor. Instead you give them the right to buy stock in your equity round when it does happen, on whatever the terms turn out to be.
Features of a safe:
- Unlike a convertible note, a safe is not a debt instrument. Debt instruments have maturity dates, are typically subject to certain regulations, create the threat of insolvency, and can include security interests and sometimes subordination agreements, all of which can have unintended negative consequences for startups.
- Because the money invested in a startup via a safe is not a loan, it will not accrue interest. This is particularly beneficial for startups, but also better embodies the intention of investors, who never meant to be lenders in the first place.
- As a flexible, one-document security without numerous terms to negotiate, a safe should save startups and investors money in legal fees and reduce the time spent negotiating the terms of the investment. Startups and investors will usually only have to negotiate one item: the valuation cap. Because a safe has no expiration or maturity date, there should be no time or money spent dealing with extending maturity dates, revising interest rates or the like.
- A safe still allows for high resolution fundraising. Startups can close with investors as soon as both parties are ready, instead of trying to coordinate a single close with all investors simultaneously.
Read the full article here on Y Combinator.