Convertible Notes/ SAFE Notes Vs. CCPS or Equity - the hidden story
Convertible Note/ Safe Notes
I’ve been seeing many early-stage VCs / HNIs using convertible / SAFE notes financing.
Should you be choosing them over Equity or CCPS?
SAFE came into vogue in late 2013 for 2 reasons:
> Reduce legal and administration costs
> Reduce back-and-forth on valuations
Here’s how they can go wrong:
SAFE instruments can often get abused and may end up abusing you later.
Multiple rounds with multiple caps can make the cap-table extremely messy and founders tend to lose track of their dilution.
How long will ‘kicking valuation down the road’ help?
Valuation events are healthy. Both discover what gives a business its value and align on the long term objectives.
SAFE is not great for everything.
SAFE notes are great for bridge rounds, but when used as a substitute to ‘venture financing’, they end up becoming dumb money.
Is there an alignment problem?
Investors want a low valuation.
Founders want a high valuation.
This non-alignment could mean reduced flexibility to scout/ wait for better deals.
Lead investors do add value.
A Lead is a pretty potent role. Validation. Diligence. Deliberations. Don't discount the value of that.
👊 Be SAFE in moderation.
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