SAFE-style warrants or convertible bonds: which seed instrument

Quick answer. The SAFE-style warrant (in France, the BSA AIR) and the convertible bond both let an investor put money in at seed stage without fixing the valuation right away: the investor enters the capital at a future round, with a discount and often a valuation cap. The key difference: the warrant is not debt, the convertible bond is, with interest and repayment if conversion does not happen.

Raising funds at seed stage often stumbles on valuation: too early to fix it, yet the investor wants in. The warrant and the convertible bond answer this problem by deferring the valuation to the next round. But these two instruments do not have the same nature or the same consequences. Here is the comparison to choose well.

Both instruments share a logic: invest now, value later.

At seed stage, fixing a valuation is difficult and risky for both parties. The warrant and the convertible bond let the investor put in money immediately, converting their investment into shares at a future financing round, on preferential terms. These terms generally include a discount on the next round's price, rewarding the early risk-taking, and often a valuation cap protecting the investor if the value soars.

This deferred-valuation mechanism is what makes these instruments popular for a first round, as we describe for the seed to series A raise.

The fundamental distinction lies in the legal nature of the instrument.

The warrant is not debt: the investor receives subscription warrants in exchange for their payment, with no repayment claim or interest. If the next round happens, the warrants give the right to shares; the investor's risk is that of a shareholder. The convertible bond is debt: it bears interest and must be repaid if conversion does not occur. It therefore protects the investor more, who stays a creditor until conversion, but it weighs on the company's liabilities.

The choice depends on the balance of power and the maturity of the project.

The warrant, simple and fast, suits seed rounds between founders and business angels who accept shareholder risk, without weighing down liabilities. The convertible bond suits when the investor wants creditor protection, or when a repayment remains conceivable in the absence of a next round. The more mature the project and demanding the investor, the more the convertible bond imposes itself; the earlier and more confident the round, the more the warrant suits. The choice combines with the taxation of the subscription, notably the SME and JEI subscription relief.

Neither the warrant nor the convertible bond is better in absolute terms: they answer different needs. The warrant favours simplicity and the absence of debt, the convertible bond the protection of the investor.

Our approach is to choose the instrument by the maturity of the project, the profile of the investors and the desired effect on the balance sheet. In all cases, the discount and the valuation cap must be negotiated carefully, as they determine the founders' future dilution, to be anticipated in the cap table. A poorly calibrated instrument can heavily dilute founders at the next round, where careful negotiation preserves the balance.

Founders at seed stage wanted to raise from business angels without fixing a premature valuation. The warrant, simple and debt-free, let them cash in the funds quickly, with a discount and a cap negotiated for the next round. A more cautious investor preferred a convertible bond, wanting to keep a creditor status in case the series A round was delayed. Both instruments coexisted, each suited to the investor's profile, and the future dilution was simulated in the cap table.