SAFEs and CLAs: Picking the right investment tools for your European startup

Securing the right funding can make or break your startup. With the right approach, you can land the capital you need to grow your team, build a better product, and scale faster. 

Choosing between a SAFE round or using a CLA depends on several factors related to the startup’s stage, financial needs, and the dynamics between founders and investors. But where do you begin? And how can you feel confident you’re making the right choice for your situation?

While we’ve previously explained the definitions and mechanisms for SAFEs and CLAs, in this article, we’ll explain the key differences between them, along with the pros, cons, and practical tips for each, so you can compare them more easily and understand which is best for you. 

1. Your company's stage and financial needs 

Early-stage startups: SAFEs are often ideal for pre-seed or seed-stage companies prioritizing speed and simplicity. These startups benefit from SAFEs’ lack of maturity dates and interest, which reduces immediate financial obligations.

Growth-Stage startups: CLAs are better suited for startups that are a bit more mature. Their structure provides clarity and security for investors through interest payments and repayment timelines.

What to consider: 

• Is the company in an early growth phase, requiring flexibility, or in a later stage, needing more structured terms?
• Does the startup have the cash flow to handle potential repayment under a CLA, or is avoiding financial obligations a priority?

2. Investor preferences and negotiation dynamics

SAFEs appeal to investors comfortable with uncertain timelines for returns. They are popular with angels and venture capitalists who prioritize potential upside over security.

CLAs, on the other hand, attract investors seeking more structured agreements, such as venture debt investors, as they offer interest or repayment guarantees.

What to consider: 

• Are your investors seeking simplicity and flexibility, or do they prefer defined terms and security?
• How much room do you have to negotiate the terms to suit the startup and the investors?

3. Legal implications and ease of execution

SAFEs are straightforward and standardized, making them quicker and less expensive to draft and execute.

CLAs, while offering more robust terms, require legal expertise to be structured appropriately, as they include additional clauses related to interest rate, maturity, repayment rights, or conversion triggers. However, since they do not imply a set valuation, they are still considered a simple to use instrument.

Also note that SAFEs may require more customisation to comply with shareholder rights and corporate law in some European countries, while CLAs are more common in Europe because debt instruments are widely recognised legally.

What to consider: 

• Does the startup have the resources to manage the slightly more formal legal setup of a CLA?
• Are there existing agreements, such as SAFEs or convertible notes, that could complicate either option?

4. Impact on long-term relationship and trust between founders and investors 

SAFEs work well in relationships built on trust, where investors are confident in the startup’s ability to grow and raise additional funding.

CLAs, with their defined repayment and interest terms, can provide reassurance to investors who require more security and structure.

What to consider: 

• How strong is the relationship with your investors, and how much flexibility are they willing to give?
• Do the terms align with the expectations and trust level between both parties?

6. Market conditions and investor sentiment

Both SAFEs and CLAs can be influenced by the current market climate and investors' feelings about risk. In a bull market, investors may be more open to flexible terms, while in more challenging times, they tend to lean toward more structured agreements, and get downside protection (loan repayment option, interest).

What to consider:

• How do current market trends impact investor expectations?
• Are investors in your network more inclined towards flexible terms or more defined structures?

7. Conversion terms and valuation considerations

The way each instrument converts to equity can impact future ownership and dilution. SAFEs convert based on future priced (equity) funding rounds, while CLAs may come with additional pre-set conversion formulas that affect valuation outcomes, for example interest is usually added to the principal before conversion, which means slightly more dilution for founders.

What to consider:

• How will the conversion terms affect your future equity and ownership?
• Do either option's valuation caps or discounts align with your growth projections?

8. Tax implications and regulatory environment

Both instruments can have different tax treatments and may be affected by evolving regulations. Understanding how each option fits within your startup’s tax and legal framework can help you plan for long-term success.

What to consider:

• What are the potential tax consequences of each financing method?
• Are there any current or upcoming regulatory changes that favor one option over the other?

SAFEs vs CLAs - in a nutshell

Here's a comparison table between SAFEs and CLAs, designed to help you quickly see the differences.

If you're still weighing your options between SAFEs and CLAs, we invite you to watch our previous webinar on the impact of convertibles on ownership structure. 

In this session, we explain the mechanics behind each financing tool, including legal structures, conversion formulas, and investor expectations. 

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