Angellist

[Patriota4]

What is the difference between SAFE, convertible debt and Equity fundraising types?

 

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[Gale4rc]

Google....

 

[Patriota4]

I'm looking for clarification as I don't understand it. Is one more common than the other in online startups?

 

[Josh]

My understanding in laymans terms:

Equity = you get a piece of the company
Convertible debt= a bond that can be converted into equity at a later date (if certain contingencies are met)

Funding via convertible debt is useful for startups for several reasons:

Valuation - It is very difficult to value a startup (especially when it is pre-revenue). A convertible note would delay the issue of valuation.
Speed - Giving up equity in a company is a big deal and negotiations are often long and drawn out. Debt is a lot easier to negotiate.
Cost - Convertible note term sheets are much cheaper than equity term sheets. Convertible debt has much better interest rates than say a bank loan.
Control - Convertible debt will not affect voting rights in the company which allows the founders to retain control over the direction of the entity.

 

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[Josh]

Oh and a SAFE (simple agreement for equity) is basically a simplified convertible note without a maturity date. It is also not a loan and therefore will not accrue interest. It is a relatively new method of financing and will probably replace the convertible note (in the startup world).

 

[Patriota4]

Thank you