SAFE Notes or Convertible Loans for Capital Raising
In recent years SAFE notes have become a common way of managing investing in the startup scene.
Traditionally, if you are a start-up looking for an investment, angel investors (individuals with high incomes) partner with the start-up before launch. In return, they generally require equity or the promise of equity.
Usually, this has been done through a convertible note. This validates that the company owes the angel investor the agreed value of equity which can later be converted.
However, with the arising challenges of convertible notes, Y-Combinator, a seed funding platform in the United States launched A Simple Agreement for Future Equity (SAFE). This is an emerging and innovative method of fundraising for start-ups to raise capital in Australia. Since its launch in 2013, it has gained traction, presenting a convenient solution for investment.
The key difference between a SAFE loan and convertible loan. A SAFE is a non-debt convertible security, whereas a convertible loan is a debt instrument. This ensures that your startup can mitigate insolvency.
So, how do SAFE notes work?
A SAFE allows startups to enter an agreement with investors whereby they make a cash investment into a company in return for future shares when certain triggering events occur. These triggering events can include the sale of the company or future equity financing.
What are the advantages of using a SAFE note?
There are various advantages of utilising a SAFE for your startup, including:
- Simplicity: A SAFE is quite simple and straightforward. They do not have an end date meaning you are not subject to a deadline. They do not accrue interest over time and are low in cost to manage and create. Also, the document is 5-pages meaning a short and straightforward process.
- Negotiation: As a SAFE has limited terms, the negotiations between an investor and startup will be minimal. As such, the negotiation process is efficient and quick leading to lower costs.
- Flexibility: The limited terms and no end date, provide the startup with more freedom during transactions. Additionally, a SAFE does not have a term so you are not obligated to various deadlines.
A SAFE agreement provides a convenient, innovative and favourable solution for start-ups looking to raise capital. With the increasing popularity in Australia, start-ups and investors are looking to shift towards this investment.
If you need assistance in deciding whether a SAFE is right for your start-up, get in touch with us via the contact form or by calling 1300 337 997.