February 7, 2023

Convertible Notes V. SAFEs: A Guide For Saudi Investors

Convertible Notes V. SAFEs: A Guide For Saudi Investors :

The world of investments in Saudi Arabia is essentially a thriving one. Start-ups with growth potential can access investments in several forms now. Convertible notes and SAFEs are investment vehicles utilized by founders to grow their products and by investors to gain value.

What are SAFEs?

SAFE notes, Simple Agreement for Future Equity is a document that start-ups use to raise pre-seed or seed capital. They were designed in 2013 to simplify the process of convertible notes. SAFEs usually work as a legally binding promise that gives an investor right to purchase equity in a company at a future date.

What are Convertible notes?

Convertible notes are short-term debt instruments that can be converted into equity when certain pre-determined agreements are met. Investors loan a start-up company money and are usually paid back in equity. Since they are debt instruments, they have maturity dates and interest rates.

Convertible notes v. SAFEs

Both SAFEs and Convertible notes have a few similarities. They allow an investor to purchase future equity in a company, i.e., they use the concept of “convertible equity.” In addition, both are useful for start-up founders to finance their company at the seed or pre-seed stage.

However, one primary feature that differentiates them is that while convertible notes work as debt instruments, SAFEs are not. Thus, convertible notes have interest rates and maturity dates, a SAFE does not have a maturity debt, and no interest accrues on it.

Furthermore, convertible notes operate on a short-term basis, for example, one year; SAFEs have no time cap. In essence, a SAFE can only convert to equity in the event of a triggering event like the company’s next fundraising round or a merger. The occurrence of an event does not bind convertible notes before they can convert to equity.

Lastly, SAFEs were created to simplify the process of convertible notes. While convertible notes are usually lengthy documents with plenty of grammar and variables, a SAFE is usually only 5-pages long.

Guide to SAFEs and Convertible notes for Saudi investors

For the Kingdom of Saudi Arabia, where start-up funding is an essential part of its economy, understanding convertible notes v. SAFEs as investment vehicles is helpful.

Both vehicles allow seed investors to derive value from their investments. They won’t have to be part of the board of directors whose funds are tied to the company. All the investor does is loan the company money, enter into an agreement, and receive equity; for convertible notes, this happens whenever the parties agree to, while for SAFEs, during the company’s subsequent funding round.

Bottom line

Although both Convertible notes and SAFEs have different pros and cons, they are still effective as investment routes for investors and early-stage companies.
As done in this article, a guide that breaks down both SAFEs and Convertible notes can help Saudi investors know how both investment vehicles work, and your preferred route to investing in start-ups.

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