The loan has a fixed term and an interest rate over time. The interest rate is negotiable, depending on the amount investors want to invest and the amount you want to invest (there is usually a current market rate that will vary, so check with other founders who have recently increased on a convertible loan). If you make your decision, especially if you opt for more complex change notes, it`s really important not to write the notes and terms yourself. Although they are simple compared to traditional financing methods such as loans, there are still tricky mathematics and clauses that you need to include for yourself and the value of your business in the future. Be sure to work with a credible law firm lawyer throughout this trial to ensure that everything is well maintained. 1) Convertible notes offer more control. Other provisions can be added so that the founder gets exactly what he wants, not the fairly broad and simplistic agreement offered by a SAFE note. You don`t have to negotiate a pre-money valuation, the paperwork is usually shorter (which means making it cheaper with your lawyer and accountant) and you don`t always have to agree on the size of the round – some startups keep a processing note open for a while, investors` bank checks as they come in. 3) The maturity date may provide for clear conversion terms, such as the conversion of shares into shares or the repayment of the principal loan. While the due date locks the founder into a conversion plan, they have more options on how this conversion is handled. The technology start-up sector also uses two types of alternative investments, one called a “conversion note” and a “SAFE note.” Here too, a SAFE is not a debt instrument and therefore has no maturity date.
Convertible bonds have a maturity date, which can cause some problems if the maturity date passes. Once you have reached the due date, an entrepreneur has two options: the net effect is to reduce the investment will of future VCs, as they will receive a less good agreement than SAFE/Noteholder, which will have a negative impact on the financial situation of the company over time. In addition, business creators will likely see that their ownership of the business will decrease as the impact of NOTES/SAF is highlighted as a new funding cycle approaches. In essence, a SAFE note sets the price and amount of the future share on which the investor will have rights at a later date. At first glance, this sounds like a standard debt-to-equity agreement, but a SAFE rating is more like other equity instruments. With respect to the disadvantages of both SAFE and convertible bonds, both generally use a combination of rebates and caps that offer investors a better deal compared to the price they pay for the shares when the option to purchase is exercised than future venture capitalists. A cap amount is the maximum amount that an investor must ultimately pay for preferred shares once the notes are converted, not the minimum amount. It is possible to negotiate an unlimited note, but it is really difficult. A low cap will allow investors to repurchase more of your common or preferred shares with their initial investment. This can have a negative impact on the company`s ability to raise money in future rounds, which could force the founders to agree on a “down round” in which the shares are offered at a lower price than the previous rounds. The entity receives cash from the funder in return for the commitment to repay this amount plus interest on the due date.
Once the trigger date is made, the convertible bond is converted into a fictitious amount of capital and interest used by the investor to buy shares of the company. As the definition points out, convertible notes can be complicated and time-consuming. On the other hand, a SAFE is a 5-page document that was created to optimize the investment process.