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If you`re a startup founder seeking funding, you may have heard of both safe agreements and convertible notes. While both are popular ways for early-stage companies to raise capital, they have some important differences that should be taken into consideration.

First, let`s break down what each of these terms means.

A safe agreement is an acronym that stands for “simple agreement for future equity.” It`s an investment contract that allows investors to put money into a company in exchange for the promise of future equity, similar to a stock option. In other words, the investor is betting that the company will be successful and will eventually go public or will be acquired by another company.

A convertible note, on the other hand, is a debt instrument that can be converted into equity at a later date. Investors loan money to the company, and when a certain trigger event occurs, such as a new funding round or an IPO, the debt converts into equity. This means that investors can benefit from any future success of the company.

So, which one is the better option for your startup? Here are a few things to consider.

1. Simplicity

One of the main advantages of a safe agreement is its simplicity. It`s a relatively straightforward contract that doesn`t involve any interest payments or maturity dates. This makes it easy to set up and less expensive in terms of legal fees. In contrast, convertible notes have more complicated terms, such as interest rates and conversion ratios, which can be confusing for both founders and investors.

2. Valuation

When it comes to valuing your startup, a safe agreement doesn`t require you to set a valuation upfront. Instead, it allows investors to invest in your company at a discount to the valuation in the next funding round. This can be helpful for founders who are not sure how to value their company or who are concerned about giving away too much equity too soon. A convertible note, on the other hand, does require a valuation, which can be a challenge for early-stage startups with limited financial history.

3. Investor protection

Both safe agreements and convertible notes offer some degree of protection for investors. However, safe agreements tend to be more founder-friendly because they don`t have any interest payments or maturity dates. This means that investors may not get their money back if the company doesn`t succeed, unless there is a specific trigger event such as an acquisition that allows them to convert their investment into equity. In contrast, convertible notes offer more protection for investors because they have a maturity date and typically come with interest payments. If the company fails to convert the debt into equity, the investor can demand repayment of the loan.

In conclusion, both safe agreements and convertible notes have their pros and cons, and the best option depends on the specific circumstances of your startup and the preferences of your investors. If you`re seeking a simple and flexible way to raise capital without having to set a valuation, a safe agreement may be the way to go. However, if you`re looking for more investor protection and are willing to accept the added complexity, a convertible note may be the better choice. In either case, it`s important to work with an experienced attorney who can help guide you through the process and ensure that your interests are protected.