Today we’re going to be talking about, what is a safe note. Essentially, a safe note is a way to raise money. It’s a very founder-friendly way of raising that cash at the early stages of a seed, maybe like Series A, or in-between if you’re doing a bridge round.

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The history of the safe notes: they came into place as a result of Y-Combinator back in 2013 or so when they realized that convertible notes didn’t really give the founders a lot of flexibility when raising money. So, as a result of that, the safes came into place.

Essentially, safe notes, to really understand the concept, it’s not a form of debt like you would see on convertible notes, but a promise of converting that money that the investor is giving you in something of value, perhaps equity down the line.

In terms of the benefits of the safe notes, one of the critical ones is that you don’t need a lawyer to do this. We’re talking about five pages. You can literally get the template of the safe note, and get it done yourself. I think the ease of getting a structure of this nature is one of the main attractions of safe notes.

You need to know that this is something essentially new. Not so new, for example, if you’re in the Bay Area in San Francisco, Silicon Valley, or so forth, or another major startup hub, like, for example, in New York. But if you were to go overseas, perhaps this adds a layer of complexity where the investor is not so familiar with how a safe note works, and you may scare people off.

So you want to make sure that if you are using this form or structure to raise money, you’re going to be putting it in front of investors that are going to be okay with it, that are familiar with it, and where you’re not essentially using or adding this as a way to add friction in order to get that money that you’re seeking.

In terms of when you’re using a safe note: you’re going to be using this on the seed round where you’re raising your first trench of money. You’re going to be using this, as well, on a bridge round, where you’ve not had enough of your milestones to raise an equity round, and you need a little more oxygen to extend your runway so that you can continue executing and unlocking certain milestones. Or you can use this like an additional A that you do, or between the seed and the A, where it’s not necessarily a bridge round per se, but a way to get that money in.

Now, the two most important things about safe notes when it comes to the structure and the terms are either there is a cap, meaning you’re already establishing a valuation where they’re not going to go over when that conversion happens. Or, perhaps, the discount that you’re providing on the valuation.

For example, if you do a round, let’s say the Series A round, and it ends up being 20 million, and you’re giving – to throw in a number – 10% of a discount. Then, they’re not coming in at 20 million as everyone else is coming. Maybe they’re coming in at that point at 18 million pre-money. So the pre-money is before the money kicks in, and the post-money is when the investment, that injection of capital has also been put into the business.

The main difference, again, between the convertible note and that safe note is that the safe note basically is not a form of debt, and the convertible note is essentially a form of debt in which that is going to be converted into equity in the next round of financing.

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