If you are an entrepreneur you should use SAFE Notes to raise capital
Early-stage companies that need to raise the first round of capital must select the smartest instrument to grow their business. The two most common are SAFE Notes which is a simple agreement for future equity and Convertible Notes or a form of debt that can convert to equity.
SAFEs have become the preferred instrument in Silicon Valley, which is indisputably the world capital of venture capitalist and start up. A SAFE Note works as a warrant since it’s an option to purchase equity later based on the terms the agreement defined. In 2013, Y Combinator, the Silicon Valley Accelerator developed SAFEs to provide a streamlined, cost effective and lean process that protected entrepreneurs and the investors. It became the most preferred instrument replacing the more traditional convertible note, a debt instrument that allow entrepreneurs to raise capital with a promise to convert into equity at the note’ maturity. SAFE NOTES emerged as the low cost go to instrument to first time entrepreneurs, angel investors as well as VCs investors.
SAFEs have two distinguishing factors, a Valuation Cap and/or a Discount. Here below we break them down:
- Valuation Cap — More commonly known as cap, it’s the maximum valuation that the investor will be valued at if the SAFE already converts to equity. The lower the valuation cap, the less interesting the deal is for founders because investors can convert their notes into more equity in the company.
- Discount — This refers to the discount that the venture capital firm, angel, or startup could get at the next financing round’s valuation. The discount rate of a SAFE describes the ‘discount’ that investors will receive on the priced round when it converts. The higher the discount, the less advantageous the deal is for founders because investors receive more equity.
SAFE notes are five-page documents that have no interest or end date. They’re simpler than convertible notes. They’ll usually be straightforward, that’s why anyone may be able to understand and even draft one without help from a costly lawyer. Also, SAFE notes free up the time of investors while helping the company move at a faster rate with less bureaucracy. That’s because investors aren’t required to sign off on the decisions…