CHANGES IN CONVERTIBLE INSTRUMENTS FOR EARLY STAGE FINANCINGS

Contact: Roger Rappoport, Partner and Aaron Sokoloff, Senior Associate, Procopio
Posted Jul 1, 2019

There are currently two main types of convertible instruments that are in widespread use for pre-Series A and other “bridge” financings: convertible promissory notes and SAFEs (Simple Agreements for Future Equity). Each of which are alike in that the amounts invested under the applicable instrument convert into shares of the issuing company in question, upon the happening of certain events, which is most often a significant round of funding led by institutional investors. The SAFE, developed by the high-profile Silicon Valley accelerator Y-Combinator, captures the essential economic terms of convertible notes without carrying actual debt, accruing interest or a maturity date (any of which can be problematic for startups, while generally adding little practical value for investors), and has become increasingly popular.

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