Why SAFEs Can be Confusing

NOTE: This article originally appeared on Inc.com on May 22, 2017.

Entrepreneurs often raise capital with a combination of convertible notes and an agreement called a SAFE, or Simple Agreement for Future Equity. A SAFE seems like a no-nonsense DIY solution for early-stage companies—but there's more you need to know about them than you might realize.

Debuted in 2013 by Y Combinator, the SAFE doesn't accrue interest. It has no maturity date or expiration date. It converts into equity on pre-negotiated terms in connection with a future priced equity round.

Convertible notes, which were the norm before SAFEs came along, are agreements to eventually convert an investment to a stake in the company. They have maturity dates and bear interest. Convertible notes and SAFEs are quick, painless ways to raise money because their terms are relatively fixed. They're fairly straightforward resources for early-stage entrepreneurs—until they aren't.