Early-stage startups in New York often turn to Convertible Notes or SAFEs (Simple Agreements for Future Equity) to raise initial funding before a formal valuation is set. Both instruments offer a faster, simpler, and more cost-effective way to secure capital—but they come with key differences that founders must understand.

If you're a New York founder weighing your options, here's what you need to know about how these tools work and how to choose the right one for your startup.

What Is a Convertible Note?

A Convertible Note is a form of debt that converts into equity upon a future financing round. It accrues interest and typically has a maturity date, at which point the company may need to repay the note or convert it to equity.

Key Features:

●      Debt Instrument: It's technically a loan with interest and a repayment obligation.

●      Conversion Trigger: Converts into equity during a future priced round.

●      Valuation Cap and Discount: Offers early investors a better deal than later ones.

●      Maturity Date: Sets a deadline for conversion or repayment.

Pros:

●      Familiar to many investors

●      Offers protections to investors

●      Can be customized with strong terms

Cons:

●      Adds debt to your balance sheet

●      Can pressure founders if maturity approaches before a funding round

What Is a SAFE?

A SAFE (Simple Agreement for Future Equity) is an equity instrument, not debt. It grants investors the right to convert their investment into equity at a later financing event, usually at a discount or valuation cap, but without interest or a maturity date.

Key Features:

●      No Interest or Repayment Obligation: Less pressure on founders.

●      Conversion Terms: Typically includes a discount or valuation cap.

●      No Maturity Date: Investors wait for a triggering event.

Pros:

●      Founder-friendly and flexible

●      Clean, short, and easy to understand

●      No debt on the books

Cons:

●      Less protection for investors

●      Can lead to founder dilution if not structured carefully

●      Not ideal for later-stage fundraising

Key Differences: Convertible Note vs. SAFE

How New York Law Impacts Your Choice

While both instruments are used nationwide, New York founders should be mindful of:

●      State Usury Laws: Convertible notes must comply with interest rate restrictions.

●      Corporate Governance: Ensure your governing documents allow for these types of financings.

●      Investor Expectations: Some New York-based VCs may prefer one instrument over another depending on your growth stage.

So, Which One Is Right for You?

●      Choose a SAFE if you're raising from friends, family, or accelerators and want speed and flexibility with minimal legal costs.

●      Choose a Convertible Note if you're working with more sophisticated investors who expect repayment terms, or you're closer to a priced equity round.

Either way, choosing the right structure can significantly affect your startup's future cap table, investor relationships, and fundraising strategy.

Work with Legal Counsel Who Knows the Landscape

At Ingram Law Firm, we help New York startups and entrepreneurs navigate early-stage fundraising with confidence. We tailor financing documents to your needs and ensure you're protected from unforeseen consequences down the road.

Get in touch with us to discuss your capital-raising strategy and how we can help you move forward.

This information is not meant to provide legal advice nor does it form an attorney client relationship. If you would like more information, please schedule a discovery call with a member of our team who is standing by to help take this exciting first step.