Convertible Notes vs SAFEs
Written by Harry Prabandham
Curated by Rubric Financial
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Convertible Notes Explained
- A convertible note is debt that converts to equity at a future priced round, typically carrying a 5-8% annual interest rate and 18-24 month maturity date
- Notes include a valuation cap (maximum conversion price) and/or a discount (typically 15-25%) to reward early investors for higher risk
- At maturity, if no priced round has occurred, the note may convert at the cap, become payable as debt, or be extended by mutual agreement
- Interest accrues and converts to additional equity at the conversion event, slightly increasing investor ownership beyond the principal amount
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About the author
Harry PrabandhamFounder & CEO
Founder and CEO of StartupCFO. MBA from Wharton, MS in Computer Science, and decades of experience building and advising venture-backed startups.
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GlossarySAFE (Simple Agreement for Future Equity)
Convertible instrument commonly used for early-stage rounds.
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GlossaryValuation Cap
The maximum company valuation at which a SAFE or convertible note converts into equity.
GlossaryConvertible Note
Debt instrument that converts to equity at a future priced round; includes a valuation cap, discount, interest, and maturity date.
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