STARTUP MANUAL

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While using a convertible note means you can technically
delay valuing your business, some notes will have a ‘valuation
cap’ (i.e. a maximum price on the note that will convert into
equity). Parties negotiate this valuation cap when raising
the round, so you are effectively negotiating a valuation
when raising under a note.
Startups typically use convertible notes at the seed round
stage, although they can be useful when raising bridging
finance between rounds. A convertible note should specify:
• how much is being invested;
• what interest is payable;
• when the loan will convert;
• what discount rate will apply; and
• the valuation cap.
Importantly, as debt is regulated, you
should ensure you comply with any
applicable regulations when dealing with
convertible notes.
found in a convertible note (i.e. a priced round and
a liquidation event).
The number of shares the investor receives on conversion
is linked to the upfront cash injection they make and the
share price of the priced round or the liquidation event
(as applicable). As with convertible notes, startups may
issue equity at a discount, and there may be a valuation cap.
As the SAFE is not debt, if the startup enters insolvency
before the cash converts, then the startup agrees to pay
the investor an amount equal to its cash injection before
making any payments to its shareholders.
The advantages of raising capital using SAFEs,
as opposed to convertible notes, are as follows:
1. SAFEs do not have a term (which means that if a
trigger event never occurs, then the investor will
never receive shares)
2. interest is not payable on SAFEs and so the complexities
involved in converting interest into equity does not apply
3. SAFEs are not debt and therefore are not regulated
SAFE
The Simple Agreement for Future Equity (also known as the
SAFE) is a relatively new way of raising capital. Y Combinator,
a leading US seed accelerator, introduced SAFEs in the
United States, and it's becoming increasingly popular in
other countries with a strong startup culture.
The SAFE is similar to a convertible note minus the debt
element. In consideration for paying a cash amount to your
startup, an investor receives a contractual right to receive
equity in your startup when a predetermined trigger event
occurs. The trigger events are generally the same as those
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