Convertible Note & SAFE
Also called: SAFE · Convertible Note · Convertible Instrument
Convertible notes and SAFEs let investors provide capital now that converts into equity at a later priced round, deferring valuation. A convertible note is structured as debt with interest and a maturity date; a SAFE is not debt and has neither.
In more detail
Both instruments exist to avoid negotiating a valuation early, when there is little basis for one. The economics are driven by two terms: the valuation cap (the maximum valuation at which the investment converts) and the discount (a reduction on the next round’s price).
The maturity date is the key structural difference. A convertible note that reaches maturity without a qualifying round can become repayable, which for an early-stage company may be an existential problem. SAFEs remove that risk by having no maturity.
Founders consistently underestimate the compounding dilution of stacked instruments. Several SAFEs at different caps, all converting at the same priced round, can produce materially more dilution than any single one suggests — modelling the conversion before signing is essential.
An investor puts in ₹50 lakh on a SAFE with a ₹5 crore cap and 20% discount. The next round prices at ₹10 crore. The cap applies, so they convert as if the valuation were ₹5 crore — roughly double the equity they would have received at the round price.
What our lawyers check
- Valuation cap and discount, and which applies on conversion
- For notes: interest rate, maturity date, and what happens if maturity is reached
- What events trigger conversion, and the qualifying round threshold
- Modelled cumulative dilution across all outstanding instruments
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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