Convertible debentures and simple agreements for future equity
("SAFEs") are important financing tools
for startups, allowing founders to raise capital without
immediately issuing equity and simultaneously deferring valuation
discussions to future investment rounds. While these instruments
share similarities, each has distinct features that pose advantages
and disadvantages to founders.
Convertible Debentures
Convertible debentures are debt instruments issued by a startup
that allow investors to convert their debt into equity at a future
date. Typically, conversion occurs on the maturity date or on the
occurrence of a triggering event, such as a subsequent equity
financing. Convertible debentures also contain standard events of
default provisions, which, if triggered, would render all
obligations, including all principal and interest, immediately due
and payable.
