For Seed Funding, SAFEs Have Won Against Convertible Notes

The earliest round of financing a company raises is typically done with a convertible instrument, rather than a priced equity round. Priced equity rounds are long, expensive, and opaque legal documents—all adversarial attributes for early-stage startups. In contrast, convertible instruments are typically a page or two long and lay out, simply, the transaction and conversion terms.1

There are two major types of convertible instruments that startups use: convertible notes and SAFEs ("Simple Agreement for Future Equity"). Convertible notes, a well-trod path, are debt instruments that convert into stock at the company's next financing. Many online generators for them exist, and law firms like Orrick and Cooley offer them, too.

In late 2013, YCombinator introduced the SAFE, and AngelList data shows a rapid uptick in their use since then. To compare SAFEs with convertible notes, we filtered down the thousands of individual investments that AngelList tracks to only those that both:

• Used convertible instruments with a valuation cap (where specified) of under $20 million
• Were issued before a company had a priced equity round. This helps to isolate seed-stage financing by removing so-called "bridge rounds"—an investor loan that helps a startup get from one round of funding to the next.

Seed-Stage Convertible Investment Share, By Year

From January 2019 through July, we've seen almost 80% of early-stage convertible financing done through SAFEs, rather than convertible notes. Interestingly, this suggests AngelList deal flow is qualitatively different from angel investing more broadly. The recently published from the Angel Capital Association shows that in the 2018 deals where U.S. and Canadian angel groups invested, 44% used convertible notes, while just 1.6% opted for SAFEs.