Announcing the Safe, a Replacement for Convertible Notes

Paul Graham

YC partner (and lawyer) Carolynn Levy has created a new alternative to convertible notes, called a safe, that has the advantages of convertible debt without some of the disadvantages.  We're publishing a standard safe document for all startups to use, and we expect most future YC startups will use this when raising money.

"Safe" comes from "Simple agreement for future equity." Although the name is an acronym, we got tired of typing "SAFE" all the time when talking about it, and we've already switched to lowercase.

Carolynn wrote the standard series AA equity financing documents that we and Wilson Sonsini published in 2008.  In 2010 we advised startups we funded to switch to convertible notes, which have since become the norm, and Carolynn wrote the standard convertible note documents that we offered to YC startups to use when fundraising. (We made those available on Clerky, but we didn't publish the text separately online; sorry about that.) Convertible notes made fundraising a lot easier, but there were still a few things about them that were inconvenient.  So Carolynn has created a replacement that is essentially convertible debt without the debt.

The advantage of raising convertible debt is that it makes fundraising quicker.  You don't have to negotiate all the details you'd have to if you sold stock to an investor.  Instead you give them the right to buy stock in your equity round when it does happen, on whatever the terms turn out to be.

The disadvantage of convertible debt is that although it's only nominally debt, the law cares what things are nominally, and there are all sorts of regulations about debt.  There has to be a term, which in California can't be too long, and there has to be an interest rate not too far from market rates.   The interest on convertible notes makes conversion complicated, and the fact that the debt has a fixed term causes extra work for both parties when it has to be extended.

A safe is like a convertible note in that the investor buys not stock itself but the right to buy stock in an equity round when it occurs.  A safe can have a valuation cap, or be uncapped, just like a note.  But what the investor buys is not debt, but something more like a warrant.  So there is no need to fix a term or decide on an interest rate.

Safes should work just like convertible notes, but with fewer complications.

Learn more about safes and download the documents here.