Raising capital is a critical step for any startup, but the alphabet soup of securities – Series SEED, SAFEs, convertible notes, common stock, and Series A preferred stock – can be confusing for founders and investors alike. Each type of security comes with unique risks and benefits, and choosing the right one depends on your startup’s stage, fundraising goals, and investor expectations.
Let’s break down these common types of startup securities, comparing their advantages, risks, and ideal use cases.
SAFEs (Simple Agreements for Future Equity): A Quick and Flexible Fundraising Tool
What is a SAFE?
A SAFE (Simple Agreement for Future Equity) allows an investor to provide capital to a startup in exchange for the right to receive equity in the future, typically when the company raises a priced funding round (such as a Series A). Introduced by Y Combinator in 2013, SAFEs simplify early-stage investments compared to convertible notes.
Key Features of SAFEs:
- No Interest, No Maturity Date: Unlike convertible notes, SAFEs do not accrue interest and do not require repayment by a set date.
- Discounts & Valuation Caps: Investors often benefit from valuation caps or discount rates, allowing them to buy shares at a lower price during the next funding round.
- Investor Risk: Because SAFEs are not debt, investors have no guarantee of repayment if the startup fails.
When to Use SAFEs:
SAFEs are ideal for early-stage startup fundraising, particularly among angel investors and startup accelerators, due to their simplicity and speed. However, some investors prefer more structured investment vehicles.
Convertible Promissory Notes: A Loan That Converts into Equity
What is a Convertible Note?
A convertible note is a short-term loan that converts into equity during a future priced funding round. Unlike SAFEs, convertible notes do carry an interest rate and maturity date, requiring repayment if they don’t convert before maturity. Some include automatic conversion clauses at maturity.
Key Features of Convertible Notes:
- Debt Until Conversion: If a startup doesn’t secure follow-up funding, the note may become due, pressuring the company to repay investors.
- Accrues Interest: Unlike SAFEs, convertible notes accumulate interest, increasing the overall investment cost.
- Investor Protections: Convertible notes provide investors with greater security than SAFEs by allowing repayment if the company does not raise additional funding.
When to Use Convertible Notes:
Convertible notes are common in pre-seed and seed rounds, offering more security than SAFEs while still allowing founders to delay setting a firm valuation.
Series SEED Preferred Stock: A Middle Ground for Institutional Investors
What is Series SEED Preferred Stock?
Series SEED is a simplified version of Series A Preferred Stock, designed for startups raising their first institutional funding round. Investors receive preferred stock with specific rights but without the full complexity of a traditional Series A.
Key Features of Series SEED:
- Liquidation Preferences: Investors receive priority payouts over common stockholders if the company is sold or liquidated.
- Immediate Equity Ownership: Unlike SAFEs or convertible notes, Series SEED investors own stock from the start.
- More Investor Control: Investors often gain voting rights, board representation, and financial disclosures.
When to Use Series SEED:
Series SEED is best for startups raising $1M–$5M from professional investors who want structured protections but not the complexity of a full Series A round.
Common Stock: Standard Equity for Founders and Employees
What is Common Stock?
Common stock is the default equity type for startup founders, employees, and some early investors. While common stockholders own part of the company, they lack special investor protections.
Key Features of Common Stock:
- Lowest Priority in Liquidation: If the company is sold or fails, common stockholders are paid last.
- No Special Rights: Unlike preferred stockholders, common stockholders lack anti-dilution protections and voting control.
- Typical for Employee Compensation: Employees often receive stock options or restricted stock units (RSUs) as part of their compensation package.
When to Use Common Stock:
Common stock is issued to founders, employees, and early friends-and-family investors, but institutional investors almost always demand preferred stock.
Series A Preferred Stock: The Gold Standard for Venture Capitalists
What is Series A Preferred Stock?
Series A funding marks a startup’s first major institutional investment, typically from venture capital firms. Preferred stockholders receive financial and governance advantages over common stockholders. The National Venture Capital Association (NVCA) Series A model documents are a common starting point for negotiations.
Key Features of Series A Preferred Stock:
- Liquidation Preferences: Series A investors get their initial investment repaid first in the event of an acquisition or liquidation.
- Voting Rights & Board Seats: Investors typically gain board representation and voting power over major company decisions.
- Anti-Dilution Protections: If the company raises future rounds at a lower valuation, Series A investors are shielded from excessive dilution.
When to Use Series A Preferred Stock:
Series A is standard when a startup is raising a significant round of funding from venture capitalists, typically in the range of $5M–$20M+.
Which Startup Security Is Right for You?
| Security Type | When Used? | Investor Risk Level | Company Complexity | Common for |
| SAFEs | Pre-seed, early rounds | High | Low | Angel investors, accelerators |
| Convertible Notes | Pre-seed, bridge rounds | Medium | Medium | Angel investors, seed investors |
| Series SEED | Seed rounds ($1M–$5M) | Lower than SAFEs | Higher than SAFEs | Institutional seed investors |
| Common Stock | Founders, employees | High | Low | Founders, employees, friends & family |
| Series A Preferred | VC-backed growth rounds | Lowest | High | Venture capital investors |
Each type of startup security balances flexibility, investor protection, and complexity. While SAFEs and convertible notes make early fundraising easier, Series SEED and Series A offer a more structured approach for scaling startups.
Before choosing a financing structure, startups should consider investor expectations, growth plans, and legal implications. While SAFEs are a useful early-stage tool, not all SEEDs are SAFE, so founders should carefully evaluate their options before signing on the dotted line.
Need Help Navigating Startup Fundraising?
The Securities Group at Avisen Legal has decades of experience helping startups raise capital and structure investment deals. Contact us today to ensure you make the best financing decisions for your startup.
