Choosing the Right Investment Vehicle: SAFEs, Notes, or Equity
Investment vehicles are key tools investors use to inject capital into startups. They help structure how capital is managed, offering flexibility and alignment between founders and investors. In this blog, we’ll explore the three primary types of investment vehicles: SAFEs, Convertible Notes, and Equity.
For aspiring investors, especially those entering venture capital (VC) or investment groups, it’s crucial to understand these vehicles. They are widely used in the North American investment community, with SAFEs gaining popularity in the U.S. and Convertible Notes still favored in Canada.
Why Different Investment Vehicles?
Investment vehicles have evolved to meet the needs of the startup ecosystem. They offer varying levels of risk, flexibility, and control, allowing both investors and startups to find the right fit. These vehicles give investors options based on risk tolerance and desired involvement while helping startups raise capital at different growth stages.
1. SAFEs (Simple Agreement for Future Equity)
Introduced by Y Combinator in 2013, SAFEs offer a simpler alternative to Convertible Notes and Equity. They are popular in pre-seed and seed rounds for their flexibility and ease of use.
- Key Features: Simplicity, no interest, no maturity date, and quick deployment.
- Best for: Founders looking for easy fundraising terms.
2. Convertible Notes
Convertible Notes act as a loan that converts into equity during a future funding round. They are more complex than SAFEs but offer more protections for investors.
- Key Features: Interest rates (2-8%), a maturity date (18-24 months), discount rates (10-30%), and valuation caps.
- Best for: Investors seeking more security while still aiming for equity.
3. Equity
Equity involves purchasing shares at a set valuation, giving investors immediate ownership in the startup. Though it offers direct participation, it requires careful negotiation, especially around valuation.
- Key Negotiation Points: Valuation, equity stake, liquidation preference, anti-dilution provisions, and board seats or voting rights.
SAFEs, Convertible Notes, and Equity each play a significant role in early-stage startup funding. SAFEs offer simplicity, Convertible Notes provide security, and Equity gives ownership. For investors entering early-stage startups, understanding these tools is essential to making informed decisions and aligning your interests with the companies you support. This is why in our Investor Preparation Program we provide a full guidance in how and when use the vehicles. Sign up for the next session .
Article by:
Miryam Lazarte , GP GSA Ventures
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