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Why might the investors want a convertible note instead of getting straight stock in a start up?
Raising a convertible note as opposed to equity allows the company to delay placing a value on itself. This is particularly attractive to seed-stage companies that have not had time to show much traction in terms of their product and/or revenue.
What is the difference between a convertible note and a SAFE?
The most significant difference is that SAFE notes prescribe a specific conversion method while convertible notes offer varying conversion terms. SAFE notes convert into the next round of preferred stock that the company issues in the subsequent priced financing round.
Are convertible notes good for investors?
Convertible notes are good for quickly closing a Seed round. They’re great for getting buy in from your first investors, especially when you have a tough time pricing your company. If you need the cash to get you to a Series A that will attract a solid lead investor at a fair price, a convertible note can help.
What is a SAFE startup?
A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.
Are Safe Notes equity?
SAFE notes are a type of convertible security, while convertible notes are a form of debt that can convert into equity once certain milestones are met. Because of this, convertible notes usually have a maturity rate and an interest rate.
Why might you favor buying straight bonds over convertibles?
Convertibles offer greater potential for appreciation than ordinary corporate bonds and the investor can convert to benefit from stock price gains. In a fixed income portfolio, convertibles can enhance returns through exposure to equity-driven price increases and reduce impact of rising interest rates.
Should Startups use safe notes or convertible notes?
Startups may prefer SAFE notes because, unlike convertible notes, they are not debt and therefore do not accrue interest. However, SAFE notes do have some shortcomings that can cause entrepreneurs to pay a high price. Both convertible notes and SAFE notes are convertible securities, which means they can eventually be converted to equity.
Do safsafe convertible notes have an interest rate?
SAFE notes also have no interest rates. Even with convertible notes, interest is rarely negotiated. However, even an exceptionally low interest rate adds up over time when pressed into a conversion formula, so it’s advantageous to investors to include an interest rate in a convertible note.
What is a convertible note in financing?
Within venture capital financing, a convertible note is a type of short-term debt financing that’s used in early-stage capital raises. In other words, convertible notes are loans to early-stage startups from investors who are expecting to be paid back when their note comes due.
What happens when a convertible note matures?
The interest of a convertible note isn’t paid in cash, but instead adds up to greater shares of equity once the note matures. The maturity date is the date at which the convertible note becomes company equity. On this date, convertible notes are due and can be paid to investors in equity if they haven’t already.