As an angel investor with a keen interest in African startup funding, I’ve become involved in a growing debate between innovative funding instruments in our ecosystem. The two instruments that have particularly caught our angel’s attention in this regard are Simple Agreements for Future Equity (SAFEs) which now accounts for most early stage funding on the continent and Convertible Notes which were previously in use. These tools are both popular among early-stage investors and founders in the African market, offering a way to inject capital into promising ventures while deferring the often complex and sometimes premature task of valuation.
Both SAFEs and Convertible Notes present unique advantages and considerations tailored to the African context, where traditional equity financing may not always be the most suitable option. These instruments are especially attractive in markets characterised by rapid growth and innovation, such as fintech, agritech, and e-commerce, which are thriving across the continent.
SAFEs and Convertible Notes often include valuation caps and discounts, either individually or in combination. These features provide a level of downside protection for investors while offering founders the flexibility they need in the early stages. In this article I explore a comparative analysis of these instruments, focusing on how they operate within the unique dynamics of our African startup ecosystem.
My aim with this analysis is to shed light on the mechanics of these instruments and also provide insights for other angel investors and founders looking to optimise their investment strategies in the vibrant and rapidly evolving African startup landscape.
Time-Bound vs. Open-Ended Structure
Convertible Notes: The Clock is Ticking
Convertible Notes come with a maturity date, typically ranging from 18 to 24 months. This time-bound structure aligns with investors who prefer a clear endpoint for their investment. For African startups operating in fast-paced sectors like fintech or e-commerce, this can create a sense of urgency to reach milestones that secure follow-on funding.
SAFEs: Flexibility in Timing
SAFEs, on the other hand, do not have a maturity date. This open-ended nature can be particularly attractive to African founders who may need more time to navigate complex regulatory environments or develop innovative solutions for local markets. However, investors should be aware that this flexibility could potentially delay their return on investment.
Interest Accrual: A Key Differentiator
Convertible Notes: Compounding Value
One of the most significant advantages of Convertible Notes for investors is the accrual of interest, typically ranging from 5% to 15% annually. In the African context, where currency fluctuations and inflation can be concerns, this interest can provide a valuable hedge for investors.
SAFEs: Simplicity at the Cost of Added Returns
SAFEs do not accrue interest, making them simpler and more founder-friendly. For African startups focusing on rapid growth and cash conservation, this can be a significant advantage. However, investors miss out on the potential for additional returns that interest would provide.
Valuation Cap and Discount Options
Both instruments allow investors to benefit from a valuation cap and discount, choosing the option that maximises their shareholding at conversion.
Convertible Notes: Maximising Investor Returns
With Convertible Notes, the combination of a valuation cap, discount, and accrued interest can significantly boost an investor’s equity position. This can be particularly attractive in high-growth African markets where valuations may increase rapidly.
SAFEs: Simplified Upside Potential
SAFEs offer similar benefits through valuation caps and discounts but without the added complexity of interest calculations. This simplicity can be appealing in markets where sophisticated financial structures may be less common.
Conversion Triggers: When Does Equity Materialise?
Convertible Notes: Multiple Conversion Paths
Convertible Notes typically convert upon a qualified financing round or at maturity. This dual-trigger approach provides investors with more certainty, which can be crucial in less predictable African markets.
SAFEs: Reliance on Future Funding
SAFEs generally only convert upon a qualified financing event. While this aligns with the startup’s fundraising journey, it may leave investors in a prolonged waiting period, especially in some of our African markets where follow-on funding can be challenging to secure.
Investor and Founder Perspectives
When considering these instruments in the African context, both investors and founders must weigh their priorities:
| Feature | Convertible Notes | SAFEs |
| Maturity Date | Yes (creates urgency) | No (provides flexibility) |
| Interest Accrual | Yes (hedges against inflation) | No (simplifies cash flow) |
| Valuation Cap & Discount | Both apply | Both apply |
| Conversion Trigger | Funding event or maturity | Funding event only |
| Founder-Friendly | Less (due to debt structure) | More (no debt pressure) |
| Investor Control | More (debt provides leverage) | Less (fewer guarantees) |
Key Takeaways for African Startups
For Investors:
Convertible Notes offer more security and added value through interest, making them attractive in markets where additional returns can offset risks. They are ideal for investors looking for both flexibility and a structured timeline in the diverse African startup ecosystem.
For Founders:
SAFEs provide more breathing room without the pressure of a maturity date or interest payments. This can be particularly beneficial for African startups operating in challenging environments or developing solutions that require longer runways.
Final Words
While both SAFEs and Convertible Notes allow startups to defer valuation, they can significantly impact future valuations and equity distribution. The specific terms of these instruments, such as valuation caps and discount rates, play a crucial role in determining their effect on the company’s valuation in subsequent funding rounds. Founders should carefully consider these implications when choosing between SAFEs and Convertible Notes for early-stage funding.
The choice between SAFEs and Convertible Notes in African venture financing should be based on the specific needs of the startup and the preferences of the investors. If you’re an investor seeking a time-bound return with added value from interest, especially in high-inflation environments, Convertible Notes may be the better option. However, if you’re a founder looking to keep things simple and delay conversion, particularly in markets where longer development cycles are common, a SAFE may align better with your needs.
Ultimately, the decision should be made in consultation with legal and financial advisors who understand the nuances of each African market and can tailor the instrument to meet the specific requirements of both parties.
