What is the difference between Y Combinator’s new SAFE financing method and Ressi’s Convertible Equity financing route?

SAFE and Ressi’s Convertible Equity are fundamentally the same types of instruments with just a few minor differences.

Identifying the need to reduce the potential financial stress that convertible debt can inflict on startups at maturity, Ressi developed convertible equity as an alternative financing mechanism that operates similar to convertible debt notes, with two critical differences: (1) no interest and (2) no maturity date.

Ressi’s innovation debuted just over three years ago, with Y Combinator’s SAFE (Simple Agreement for Future Equity) following about one year later. YC took its inspiration from Ressi and pretty much followed the Ressi model, with some relatively inconsequential variations – e.g., Ressi separates the note from the purchase agreement, whereas YC combines them in a single document.

There are also some minor differences on round limitations, conversion triggers and preemptive rights, but they both function with the same purpose: eliminate maturity dates and interest, sidestep debt, and ease the process by reducing legal burdens.

Other than that, both instruments provide for equity conversion when triggered by events such as financing or dissolution. Of course, the agreement can be terminated if no triggering event occurs.

Although Mr. Ressi predicted in early 2014 that 60% of all early startup financings would use convertible equity structuring by the end of that year, estimates of mid-2015 placed it more at around 25%, leaving them still relatively untested. Their rising popularity has, however, hit a nerve for early stage investors, reflecting more long term commitment.

The ultimate takeaway of Ressis and SAFEs is essentially that they both aim for long term stabilization by eliminating those features that make convertible debt risky. Again, both securities remove interest and maturity provisions characteristic of convertible debt notes in order to reduce the risk of a run on investor calls that could trigger a domino effect, ultimately leading to a total collapse.

Finally, each agreement – whether a SAFE or Ressi – can be amended to include milestones that are tailored to the unique needs of the company. The considerations that guide those amendments will largely be the same as with convertible debt: minimizing legal fees, adapting to the sophistication of the investors, deciding what is the appropriate amount of time needed to raise financing, and how much and what kind of financing is desirable.

Another option that you might want to consider is 500 Startups ‘KISS’ docs (cc: Dave McClure).

If you have more specific questions or concerns about SAFE or Ressi or KISS, you should check out LawTrades to go over the nuances with an experienced startup attorney and pick the right one for you. You can also feel free to message me directly with any questions you have about convertible equity. Hope that helps!

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