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Convertible Notes and SAFEs in Startup Finance
Convertible Notes and SAFEs (Simple Agreements for Future Equity) are financial instruments commonly used by early-stage startups to raise seed capital without establishing an explicit valuation. Instead of issuing priced shares immediately, these instruments defer valuation until a subsequent priced equity round (typically a Series A financing).
At the priced round, the outstanding principal (plus accrued interest, in the case of convertible notes) converts into preferred stock. To reward early investors for taking higher risk, notes and SAFEs convert at a discount or subject to a valuation cap.