SAFE vs convertible note: what's the difference in Canada?

Both instruments let an early investor fund your company now and receive shares later, without agreeing on a valuation today. The difference is whether the company owes the money back in the meantime.

How do a SAFE and a convertible note compare?

	SAFE	Convertible note
What it is	A contract for future shares; not a loan	A loan that is meant to convert into shares
Interest	None	Usually accrues, and typically converts into shares with the principal
Maturity date	None	Yes; at maturity the investor may be able to demand repayment, convert or extend, depending on the note
Conversion price	Valuation cap, discount or both	Valuation cap, discount or both
On a shutdown before conversion	Under Y Combinator’s form, junior to the company’s debts	Ranks as debt, and some notes are secured on the company’s assets
Ontario securities law	A security; needs a prospectus exemption	A security; needs a prospectus exemption
Paperwork	Short standard forms many investors already know	Terms vary more from deal to deal

Is a convertible note really debt?

Yes. Until it converts, the company owes the principal and any interest, and the note sits ahead of shareholders if the company winds up. That is the main reason some angel investors prefer notes: if the company never raises a priced round, they hold a claim for repayment rather than an unconverted right to shares.

If a note states interest for a period of less than a year, such as a monthly rate, section 4 of the Interest Act requires the contract to state the equivalent yearly rate, or no more than 5% a year is recoverable. Notes usually state an annual rate for that reason.

What happens at the maturity date?

It depends on the note. Common outcomes are repayment on demand, automatic conversion at an agreed price, or an extension the investor agrees to. A SAFE avoids the question: Y Combinator’s SAFE FAQ says a SAFE has no maturity date and is designed to end only when the investor receives shares or another payout. If you sign a note, negotiate what happens at maturity as carefully as the cap.

Do both convert the same way?

Mostly. At a qualifying priced round, the investor’s money converts at whichever price the instrument gives them: the price implied by the cap, or the round price less the discount. With a note, accrued interest usually converts too, so a note investor ends up with more shares than a SAFE investor who put in the same amount. Model it with our SAFE calculator and see valuation caps and discount rates.

Do I have to file anything with the OSC?

Often, for either one. Both fall within the definition of “security” in section 1(1) of Ontario’s Securities Act, which covers notes and other evidence of indebtedness, and agreements providing that money received will be repaid or treated as a subscription for shares. So each sale needs a prospectus exemption. If you rely on the accredited investor exemption (in Ontario, section 73.3 of the Securities Act), section 6.1 of National Instrument 45-106 requires a report of exempt distribution within 10 days. Check yours with our SAFE and share filing checker, and see accredited investors and the private issuer exemption.

Can either one affect CCPC status?

It can. Under section 251(5)(b) of the Income Tax Act, a contractual right to acquire shares, immediate or future, absolute or contingent, can be treated as exercised when testing control. Depending on its terms, a SAFE or note held by non-residents could count. Ask your accountant before signing with foreign investors. See CCPC status for startups.

When to choose which

• Choose a SAFE when your investors are comfortable with it and you want a short, familiar document with no loan to repay or extend. Use a form adapted for a Canadian corporation. See how SAFEs work in Canada.
• Choose a convertible note when an investor insists on the protection of debt, or for a bridge from existing investors who expect interest. Negotiate the maturity date, what happens at maturity, and whether the note is secured.
• Either way, keep the terms consistent across investors in the same round, approve each one by directors’ resolution, and model the dilution before you sign the next one.

What to do next

We paper SAFE rounds, including the prospectus exemption review and the securities filing, at a fixed fee on our fees page.

This guide is general information about Ontario and Canadian law, not legal or tax advice for your situation. To talk through which instrument fits your round, book a free 15-minute consult.