Let's do a quick side-by-side, comparison of convertible notes and SAFEs showing the differences and adding in a few more terms as we go. Firstly, in terms of convertible securities, the convertible notes qualifies as it converts from debt into equity.

SAFEs are not a convertible security as they are not initially debt, and there aren't any debt repayments. It's simply an agreement to issue equity at a point in the future. The terms of a convertible note will include other details such as being interest bearing. There's an element of this at the debt and also and maturity dates. The maturity dates for convertible notes are usually 18 to 24 months after the closing date of the funding round. Ideally, the next round of funding will happen before the maturity date, but if it does not, the startup will either have to pay back the principle amount invested and interest of the loan in full, which is rarely done by cash, poor startups, or it has to convert the debt into equity or ask negotiate for an extension on the maturity dates. In terms of discounts and valuation caps, both are applicable to convertible notes and SAFEs. A most favored nation clause or MFN allows investors in early funding rounds to receive identical provisions included in later funding rounds, particularly if they're considered favorable. This is generally a term included in SAFEs. They don't tend to be issued with convertible notes. Similarly, prorata rights are a term seen in SAFEs, but not usually with convertible notes.

There are just a couple more key differences between convertible notes and SAFEs. The next is payouts. Both convertible notes and safes will have provisions that address payouts. When a startup company experiences a change in control, such as a sale before the early stage investors have converted their convertible note or SAFE into equity, this will be an agreement to return capital to the investors via a payout as the event that triggers the payout is unplanned, this is termed an early exit. With a SAFE note, the investor has the option of conversion to equity at the valuation cap, or a one times payout. Defaulting on a convertible note could lead to bankruptcy, so both the company and investors will be keen to agree a payout. SAFE notes in contrast are not loans and therefore do not have to be repaid. Since convertible notes are not as standardized, the payout options are negotiated, But a range of two to three times payouts is relatively common.

SAFEs have become the preferred choice among early stage startups conducting an unpriced funding round. However, certain industries such as medical devices, hardware, and biotech continue to use convertible notes in these earlier rounds. Finally, conversion thresholds. These are found in convertible notes and simply state the threshold or range for converting the initial debt components into equity. This isn't applicable to SAFEs.