Seed stage funding rounds are unpriced while later stage funding rounds such as series A, series B and beyond are priced rounds. Priced rounds have a valuation, and a valuation means the company can issue shares with a value. In this case, preferred shares, but our focus is on the seed stage and unpriced rounds. If we don't have a valuation, the most common form of consideration is to use convertible instruments. This is how people will invest. These mean the investment will be converted into equity at some future point. To do this requires convertible instruments, and the two types we see are convertible notes and SAFEs. To be clear, this is not lending from a regular bank. Convertible notes are issued to investors and it's treated like a loan with interest, but the option to convert into equity is liked by investors who want shares and just can't access them at the moment. At the early stage of a company, an alternative agreement is SAFE. This stands for simple agreement for future equity. This lacks the debt qualities of a convertible note or convertible loan, but simply offers the investor an attractive discount or valuation cap to gain shares in the company at a later date.

So the company gets cash now and the SAFE investor gets equity later on. Favorable terms, there are a few key distinctions between convertible notes and safes. Convertible notes are a financial instrument that is issued first as debt. It is then converted to equity under the terms of the agreement. The convertible notes held by the company pays interest to the investors and it has a maturity date until it is converted into equity. A convertible note will likely have quite specific terms related to the specific threshold that triggers the conversion from debt to equity. For example, these can include when a qualifying transaction occurs or when a minimum amount of capital is raised, and when the investor and company agree on the conversion. Convertible notes are considered investor friendly as they offer a return whilst the note is in its debt form, and then it allows the investors to convert into being a shareholder at a point in the future. An investor will likely have good clarity on the timeframe as to when the note is likely to convert into equity due to to the terms in the convertible notes.

In contrast, safes are a simpler type of agreement. They do not have the debts like qualities of a convertible notes. They don't carry an obligation to pay interest or have a specified maturity date when it converts into equity. But they do give investors the right to convert their safe into future equity. It's essentially an agreement to provide the investor with a specified quantity of equity at a certain point or specified events in the future. Following investment in the company. Conversion usually happens in the next liquidity event, usually a funding round or a sale of the company, and the next funding round is often Series A SAFEs are legally binding agreements, which represent a contractual right for investors to receive shares at some point in the future. Saves were introduced in late 2013 by the Y Combinator, which is a well-known and successful Silicon Valley-based incubator for startup companies. It believed that convertible notes were just too onerous. They wanted to create a simpler agreement, quick to create, and easy to negotiate.

Founders liked them as they were able to access external investments into their startups without being slowed down by negotiating interest and maturity dates and other terms. Found on the only other source of funding convertible notes.