Convertible Note

A fictional early-stage issuer raises capital using a Simple Agreement for Future Equity (SAFE) rather than a convertible note. Both instruments convert into equity upon a future triggering event. What is a key structural difference between a SAFE and a convertible note?

1. A.A SAFE and a convertible note are functionally identical; "SAFE" is simply industry shorthand for a convertible note issued to accredited investors specifically.Wrong. A SAFE is a distinct, non-debt instrument, not a rebranded convertible note.
2. B.A SAFE carries a fixed interest rate while a convertible note does not, since "agreement for future equity" implies a return is guaranteed in the meantime.Wrong. This inverts the actual features; SAFEs do not carry interest, while convertible notes typically do.
3. C.A SAFE gives the investor voting rights in the issuer immediately upon investment, while a convertible note does not confer any rights until conversion.Wrong. A SAFE, like a convertible note, generally does not confer equity or voting rights until conversion.
4. D.A SAFE carries no maturity date or interest rate and creates no repayment obligation absent a triggering event, unlike a convertible note, which is debt.Correct. This is the defining structural difference between the two instruments.

Why: A SAFE is not debt -- it carries no stated maturity date, no interest rate, and creates no obligation for the issuer to repay the investor's money if a triggering event never occurs. A convertible note is a debt instrument with a maturity date and typically an interest rate, creating a repayment obligation independent of any future equity conversion.

Fictional issuer Thornbury Labs raises money through a convertible note carrying a $5,000,000 valuation cap and a 20% discount to the price paid by investors in the issuer's next qualified equity financing. In that later round, new investors pay $2.00 per share, based on an $8,000,000 pre-money valuation and 4,000,000 fully diluted shares outstanding immediately before the round. The note's conversion mechanic gives the noteholder the more favorable of the capped price or the discounted price. At what price per share does the noteholder's principal convert?

1. A.$1.60 per shareWrong. This is the discounted price alone; it is higher than the cap price and therefore less favorable to the noteholder.
2. B.$2.00 per shareWrong. This is the new investors' round price with no cap or discount protection applied at all.
3. C.$1.00 per shareWrong. This mistakenly stacks the 20% discount on top of the cap price rather than treating the cap and discount as two independent, alternative floors.
4. D.$1.25 per shareCorrect. The cap price is lower than the discount price, and the noteholder converts at the lower, more favorable price.

Why: Cap price = $5,000,000 / 4,000,000 shares = $1.25 per share. Discount price = $2.00 x (1 - 0.20) = $1.60 per share. The noteholder converts at the lower of the two prices, because a lower conversion price yields more shares for the same invested principal, so the note converts at $1.25 per share, the cap price.