What are the pros and cons of Y Combinator’s SAFE securities versus convertible notes?

SAFE financing documents became viral when Paul Graham from Y Combinator tweeted: ‘Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.

Benefits of using a SAFE

SAFE docs are very short, 5 page documents, with very little to negotiate (just the valuation caps). Therefore, startups and investors won’t have to spend a lot of time and legal fees on hammering out the details of a SAFE. An outstanding SAFE would be referenced on the company’s cap table like any other convertible security (such as a warrant or an option).

Drawbacks of using a SAFE

A SAFE doc is not a debt instrument, so it doesn’t accrue interest or have a maturity date (so it might not convert to equity at all). SAFE requires a company to be incorporated, not an LLC, like many early stage startups are. If a company is in the form of an LLC, it may have to pay legal fees to consult with a lawyer to convert to a C-Corp. SAFES are also only about 2 years old, created by Y Combinator in Dec. 2013. (So angel investors, VC’s and attorneys often have less experience and trust in using a safe over something more established, like a convertible note.)

The jury’s still out on whether convertible notes or safes are better for startups. If you have questions about whether your startup should use a convertible note or a SAFE, feel free to shoot me a message or check out LawTrades.

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