The Downside of SAFE Notes

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

SAFE Notes were designed to simplify the investment process.

By removing many of the terms found in equity agreements, SAFE Notes reduce the complexity of startup fundraising.

SAFE notes are similar to a warrant as they give the holder the right to buy shares in the future.

There are drawbacks to SAFE Notes as follows:

There’s no debt component that can be used for payback.

SAFE notes require the holder to have a C-Corporation.

The SAFE note is listed on the Cap table like an option.

There’s no maturity date on SAFE Notes, so there’s no trigger to convert equity.

There’s no interest rate.

Over time, this can add additional value to the investor.

Many SAFE notes don’t have a valuation cap, which can reduce the value to the holder.

The presence of additional SAFE notes can reduce the return through dilution.

For early-stage funding, SAFE notes are simple to use, but they don’t always convert to equity the way investors thought they would.

Be sure to understand the SAFE note structure before using it for an investment.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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