Convertible Loan Notes vers SAFE Agreements: Good ideas and success-driven co-mates are simply not enough to get a promising business up and running. Cash-hungry startups need to secure funding as fast and easily as possible. SAFE agreements (Simple Agreement for Future Equity) or CLNs (Convertible Loan Notes) may pave the way to achieve just that. However, both agreements require a deep understanding of how these financial instruments work out for both sides, Founders and Investors. Just using a draft you may find online isn’t enough; you may contact specialist law firms like us or FIRSTADVISOR for advice before getting into trouble.
But what’s the hype about these financial instruments?
A convertible note qualifies as debt and may, under certain conditions, convert into capital. A SAFE does not require repayment or interest. So far, so good, but it is a formalized promise to obtain shares at a later date. These agreements often come at a price of discounts when used.
If a startup wants to discuss convertible notes vs. SAFEs with investors, it is of utmost importance that the founders understand how these instruments really work, what changes they entail for investors, the protections they provide for investors and founders alike, and in which situations one is more suitable than the other. This is an issue of international importance, especially for startups, business angels, and law firms focused on such financial instruments as TAXEDO LLP, which is active in early-stage financing. How else can you convince and sell a financial instrument to an investor?
Let’s start with Convertible Loan Notes.
Convertible loan notes (CLNs) are financial instruments that, unlike standard loans, do not provide for repayment at maturity but rather for conversion into shares in the company. These financial instruments accumulate interest over time and have a maturity date (often between 18 and 36 months), during which the conversion should take place or, in some cases, be repaid if the conversion event does not occur. The contract also defines conversion terms, which may vary depending on specific timing and conditions. It is a solution for the early stages, when it is still too early to accurately define the company’s value. In such cases, tools that can adapt to the context are needed, which represents a key consideration for the funding. Do we want to have Venture Debt or Equity?
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How do SAFE Agreements differ from Convertible Loan Notes?
A SAFE is a financial instrument for early-stage startups to raise capital without immediate valuation, acting as a warrant rather than debt. Investors receive future equity, usually during a priced round, based on a valuation cap or discount, offering a faster, cheaper alternative to convertible notes with no interest or maturity dates.
At a glance, SAFE agreements come with the following key points for the startup funding:
- Primarily used to raise seed or pre-seed capital, as proposed by us (TAXEDO LLP) and FIRSTADVISOR
- The contracts contain Trigger Events, and Investors typically receive shares in a future “qualified financing” round (e.g., Series A or an IPO) or in a liquidity event, such as a company sale or a sale of parts of the company.
- Often, Valuation Caps & Discounts are agreed between the contracting parties, pricing in the risk of an early-stage funding. Safes often include a valuation cap (a maximum price for conversion) or a discount (e.g., 10-25% off the next round’s price) to reward early risk-taking.
- A SAFE agreement does not carry Debt or Interest: Unlike loans, SAFEs do not accrue interest or have maturity dates, reducing immediate repayment pressure on founders.
FAQ - Fragen und Antworten
How can we use these Financial Instruments?
Using both of these financial instruments requires founders to understand how they work; otherwise, how can they explain the advantages and disadvantages of SAFEs and CLNs to investors?
At TAXEDO LLP, we are happy to assist startup founders in bringing their ideas to life and securing the necessary capital, often in collaboration with FIRSTADVISOR, a firm specializing in, among other things, company formations in the EU, Switzerland, and select locations worldwide.
Contact us to secure funding for your startup. We are multilingual and also speak German. We are available on WhatsApp and Telegram, by email, and phone. Please use our Floating Sidebar to contact us directly.
In which Countries can I use these Financial Instruments?
In principle, these financial instruments can be used in any country, but they must be adapted to the local legal framework. These financial instruments were originally developed in the U.S. to help Silicon Valley companies raise the funds they needed. Today, both SAFEs and CLNs are used in many common law jurisdictions as well as in tech hubs in Germany (Berlin, Frankfurt) and France (Paris).
Contact us to secure funding for your startup. We are multilingual and also speak German. We are available on WhatsApp and Telegram, by email, and phone. Please use our Floating Sidebar to contact us directly.
Can you assist us with drafting contracts and negotiating with investors?
Of course, we help founders select the available financial instruments, draft and adapt them to existing requirements, and negotiate with prospective investors. We often assist startups, even in the early stages of choosing a location, as not all locations are equally suitable for raising capital or for tax conditions.
Contact us to secure funding for your startup. We are multilingual and also speak German. We are available on WhatsApp and Telegram, by email, and phone. Please use our Floating Sidebar to contact us directly.
