Safe Notes VERSUS Convertible Notes

Posted on May 31, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

By AI

***

***

What Is a SAFE Note?

A SAFE note is a type of convertible security that specifies a certain amount of money an investor will pay you as a business owner. In exchange, you agree to give the investor a certain amount of equity in your company at an agreed-upon future date. In other words, a SAFE note confers the right for an investor to purchase shares in your company in a future-priced round.

How SAFE Notes Work

According to ContractsCounsel, a SAFE note works in the following way:

  1. An investor provides funding in exchange for the right to future equity.
  2. You use the funding to grow your business.
  3. After your company grows sufficiently, you secure another investor, and your company receives a “post-money valuation.”
  4. You calculate your company’s price per share.
  5. You convert the SAFE note into the applicable number of shares and distribute them to the SAFE investor. Typically, a SAFE note converts after an equity financing round.

Example of a SAFE Note

An investor purchases a SAFE note with a valuation cap of $20 million. During the next funding round, the value of your company is set at $40 million at $20 a share. Because the SAFE note has a valuation cap of $20 million, its owner can purchase twice as many shares of your company as new investors can. This was the incentive for the SAFE investor to provide funding earlier.

STUDENT LOANS and State Taxes

What Is a CONVERTIBLE NOTE?

Within venture capital financing, a convertible note is a type of short-term debt financing that’s used in early-stage capital raises. In other words, convertible notes are loans to early-stage startups from investors who are expecting to be paid back when their note comes due. But, instead of being paid back in principal with interest—as would be the case with a typical loan—the investor can be repaid in equity in your company.

You might also think of a convertible note like an IOU. An investor provides you with capital now and the convertible note, acting as a short-term loan, ensures that you give the investor a stake in your startup later. From the investor’s point of view, the benefit in this exchange is that if they give you capital and a vote of confidence early on and you do well, you’ll repay them many times over.

How Do Convertible Notes Work?

Typically, an investor will provide an early-stage startup in need of capital with a loan (with repayment terms in the ballpark of a standard short-term loan, usually a year or two), along with repayment terms. This is the “note.” The note will include a due date at which time it’s mature and the balance will be due, along with interest. Generally, however, the note is not repaid like a normal short-term loan. Instead, you repay the investor for their loan with equity in your company, usually in conjunction with another funding round. 

If, however, the maturity date comes along and your startup has not yet converted the note to equity, the investor can either extend the convertible note’s maturity date or call for the actual repayment of the note.

Debt Paradox: https://medicalexecutivepost.com/2025/02/04/paradox-debt-may-be-necessary-to-build-wealth/

This being said, the whole idea behind convertible notes is that your company is on a strong growth trajectory and that is why the note is being issued—it amasses value for the investor and beelines to a priced round. Ultimately, the point of a convertible note is that the noteholder, or investor, doesn’t want to get their loan paid back— they want their debt to convert into a heavily discounted security in a successful, valuable company that’s growing extremely quickly.

Cons: The major downside of a convertible note is that you will eventually be giving up some control over your business. When the convertible note comes due, the investor will be granted equity in your business. If you’re not ready to split ownership of your business with outside parties, this is not the right financing option for you.

CASH ADVANCE LOANS: https://medicalexecutivepost.com/2024/12/14/merchant-cash-advance-loans/

COMMENTS APPRECIATED

Like and Refer

***

***

Filed under: "Ask-an-Advisor", Accounting, Career Development, CMP Program, Financial Planning, Funding Basics, Glossary Terms, Investing | Tagged: , , , , , , | Leave a comment »

STOCK: Common V. Preferred V. Hybrid Securities

Posted on March 7, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

BY DR. DAVID EDWARD MARCINKO; MBA MEd CMP™

SPONSOR: http://www.MarcinkoAssociates.com

***

***

Common Stock versus Preferred Stock

A common stock is the least senior of securities issued by a company.  A preferred stock, in contrast, is slightly more senior to common stock, since dividends owed to the preferred stockholders should be paid before distributions are made to common stockholders. 

However, distributions to preferred stockholders are limited to the level outlined in the preferred stock agreement (i.e., the stated dividend payments).  Like a fixed income security, preferred stocks have a specific periodic payment that is either a fixed dollar amount or an amount adjusted based upon short-term market interest rates.  However, unlike fixed income securities, preferred stocks typically do not have a specific maturity date and preferred stock dividend payments are made from the corporation’s after tax income rather than its pre-tax income.  Likewise, dividends paid to preferred stockholders are considered income distributions to the company’s equity owners rather than creditors, so the issuing corporation does not have the same requirement to make dividend distributions to preferred stockholders. 

Preferred Stock

Thus, preferred stock is generally referred to as a “hybrid” security, since it has elements similar to both fixed income securities (i.e., a stated periodic payments) and equity securities (i.e., shareholders are considered owners of the issuing company rather than creditors). 

Hybrid Securities

Convertible preferred stocks (and convertible corporate bonds) are also considered hybrid securities since they have both equity and fixed income characteristics.   A convertible security whether a preferred stock or a corporate bond, generally includes a provision that allow the security to be exchanged for a given number of common stock shares in the issuing corporation. The holder of a convertible security essentially owns both the preferred stock (or the corporate bond) and an option to exchange the preferred stock (or corporate bond) for shares of common stock in the company. 

Thus, at times the convertible security may behave more like the issuing company’s common stock than it does the issuing company’s preferred stock (or corporate bonds), depending upon how close the common stock’s market price is to the designated conversion price of the convertible security.

EDUCATION: Books

SPEAKING: Dr. Marcinko will be speaking and lecturing, signing and opining, teaching and preaching, storming and performing at many locations throughout the USA this year! His tour of witty and serious pontifications may be scheduled on a planned or ad-hoc basis; for public or private meetings and gatherings; formally, informally, or over lunch or dinner. All medical societies, financial advisory firms or Broker-Dealers are encouraged to submit a RFP for speaking engagements:

COMMENTS APPRECIATED

Refer, Like and Subscribe

***

***

Filed under: "Ask-an-Advisor", CMP Program, Experts Invited, Glossary Terms, Investing, Marcinko Associates | Tagged: , , , , , , , , , , , , , , , , | Leave a comment »