What type of raise do I need: SAFE, convertible note or priced round? The jargon doesn't help.
I ran investor relations for a $20m Series A. Before that, most of these words meant nothing to me. Here's the plain version. General information, not advice.
The three options
A SAFE is a short contract. The investor pays now and gets shares later, usually at your next priced round. Y Combinator, which created it, says a SAFE isn't debt. No interest, no maturity date, so it's "simpler, faster, and cheaper to sign" than a note.
A convertible note is debt that converts. Interest builds up, and at the maturity date it's repaid or converted.
A priced round sells shares now, at an agreed price. It's the most paperwork.
The trade-offs
- Cost and speed: SAFEs are usually quickest and cheapest. Notes add debt terms. Priced rounds take the most legal work.
- Valuation: a priced round sets one. SAFEs and notes put it off with a valuation cap, a discount, or both. YC says discounts are commonly 10 to 20%.
- Dilution surprises: on a post-money SAFE, the investor's share is locked in. Stack a few before your priced round and the extra dilution lands on you.
The Australian bits
YC's forms cover companies formed in the US, Canada, the Cayman Islands and Singapore. Anywhere else, it says, you'll need a local lawyer.
Locally, the Australian Investment Council updated its open-source seed documents in November 2023, including a post-money SAFE. Law firm Addisons notes the new version is "more dilutionary for existing shareholders" than the old one.
Then there's ESIC. The ATO says eligible investors in an early stage innovation company can get a 20% tax offset, capped at $200,000 a year, on newly issued shares. Law firm Cowell Clarke says claiming it on a convertible note isn't viable, because a note isn't an equity interest. A SAFE might qualify, depending on how it's drafted. If your investors care about ESIC, check before you choose.
A rule of thumb
This one's mine. Small amount, from a few people who know you: a SAFE. An investor who insists on debt protection: a note, with one eye on the maturity date. A lead investor setting the price, usually in a bigger round: a priced round.
Whichever you pick, record every instrument, its cap and its discount as you go. Ethiks360 keeps that alongside the rest of your company record, so your cap table holds no surprises.
This is general information, not legal, tax or financial advice. Before you sign any SAFE, note or term sheet, take it to a lawyer and an accountant.
82/18: machines did the boring bit. The thinking's mine.