SAFE vs Convertible Note: Which Should You Use?
Raising your first money? You'll likely choose between a SAFE and a convertible note.
Both delay valuation until your next priced round. But they work very differently.
Quick Comparison
| Feature | SAFE | Convertible Note | |---------|------|------------------| | Type | Equity instrument | Debt instrument | | Interest rate | None | 2-8% annually | | Maturity date | None | 12-24 months | | Complexity | Simple (5 pages) | Complex (15+ pages) | | Investor-friendly | Moderate | More | | Founder-friendly | More | Moderate | | Legal costs | $0-2K | $5-15K |
What is a SAFE?
SAFE = Simple Agreement for Future Equity
Created by Y Combinator in 2013 to simplify early-stage fundraising.
A SAFE is:
- Not debt - no interest, no maturity date
- Not equity - no shares issued yet
- A promise - converts to equity at next priced round
How SAFEs Convert
When you raise a priced round (e.g., Series Seed), SAFEs convert to shares based on:
- Valuation cap: Maximum price for conversion
- Discount: Percentage discount from round price
- Most favorable terms: Investor gets the better deal
Example:
- SAFE: $500K with $5M cap, 20% discount
- Series Seed: $10M pre-money valuation
The SAFE converts at $5M (cap), not $10M or $8M (discounted).
Shares = Investment / Conversion Price
Shares = $500,000 / ($5M cap / Total Shares)
Types of SAFEs
Post-money SAFE (current standard):
- Cap applies to post-money valuation
- Investor knows exact ownership %
- Cleaner math
Pre-money SAFE (legacy):
- Cap applies to pre-money valuation
- Ownership depends on round size
- More complex
What is a Convertible Note?
A convertible note is a loan that converts to equity.
Key features:
- Principal: The investment amount
- Interest rate: Typically 2-8% annually
- Maturity date: When the loan comes due (12-24 months)
- Conversion triggers: Events that trigger conversion
How Notes Convert
Similar to SAFEs, but with accrued interest:
Conversion Amount = Principal + Accrued Interest
Example:
- Note: $500K at 5% interest, 2-year term
- At conversion: $500K + $50K interest = $550K converts
What Happens at Maturity?
If no priced round by maturity date:
- Extend: Most common - both parties agree to extend
- Convert: Convert at cap or agreed valuation
- Repay: Investor can demand repayment (rare but possible)
This maturity risk is a key difference from SAFEs.
Detailed Comparison
Legal Complexity
SAFE:
- 5-page standardized document
- Minimal negotiation needed
- $0-2K legal fees
- Close in days
Convertible Note:
- 15-30 pages
- More terms to negotiate
- $5-15K legal fees
- Can take weeks
Interest
SAFE: No interest. Zero.
Convertible Note: 2-8% annual interest that adds to conversion amount.
On a $500K note at 5% over 2 years:
Interest = $500K × 5% × 2 = $50K
That's $50K more dilution for founders.
Maturity Risk
SAFE: No maturity. Sits until priced round.
Convertible Note: Has a deadline. Creates pressure to:
- Raise a priced round
- Negotiate extension
- Potentially face repayment demand
Investor Protections
SAFE: Minimal. Converts when you raise.
Convertible Note: May include:
- Board observer rights
- Information rights
- Pro-rata rights
- Amendment provisions
Accounting Treatment
SAFE: Usually treated as equity (cleaner balance sheet)
Convertible Note: Treated as debt (shows as liability)
This can matter for certain grants, contracts, or future investors who see debt negatively.
When to Use a SAFE
✅ Best for:
- Very early stage (pre-seed, friends & family)
- Small raises ($50K - $2M)
- Quick closes
- YC-affiliated investors (they expect SAFEs)
- When you want simplicity
When to Use a Convertible Note
✅ Best for:
- Angel investors who prefer debt structure
- When investors require interest/maturity
- Bridge rounds between priced rounds
- Certain international investors
Common Terms to Negotiate
Valuation Cap
The maximum valuation for conversion.
| Stage | Typical Cap | |-------|-------------| | Pre-seed | $3-8M | | Seed | $8-15M | | Late seed | $15-25M |
Lower cap = better for investor, more dilutive for founders.
Discount
Percentage off the next round's price.
Typical: 15-25%
Example:
- Next round at $10/share
- 20% discount = investor pays $8/share
Pro-rata Rights
Right to invest in future rounds to maintain ownership percentage.
Usually granted above certain investment thresholds ($100K+).
MFN (Most Favored Nation)
If you give later SAFEs better terms, earlier investors get those terms too.
Common in rolling closes.
Cap and Discount Math
Both cap and discount give investors a better price. They get whichever is better.
Scenario:
- Investment: $500K
- Cap: $5M
- Discount: 20%
- Series Seed: $8M pre-money
Cap price: $5M / shares = $0.50/share Discount price: $8M × 80% / shares = $0.64/share
Investor gets cap price ($0.50) because it's lower.
Multiple SAFEs Problem
Taking multiple SAFEs at different caps creates complexity:
| SAFE | Amount | Cap | |------|--------|-----| | #1 | $250K | $4M | | #2 | $500K | $6M | | #3 | $250K | $8M |
Each converts at its own cap, creating different share prices. Track this carefully.
Red Flags to Avoid
🚩 For Founders:
- Very low caps that over-dilute
- Short maturity dates (< 12 months)
- High interest rates (> 8%)
- Onerous conversion triggers
🚩 For Investors:
- No cap (uncapped SAFEs)
- No discount and no cap
- Very high caps with small discounts
Model Your Dilution
Use our tools to understand the impact:
- Equity Calculator - Calculate post-conversion ownership
- Dilution Simulator - Model multiple rounds
- Runway Calculator - Plan fundraising timing
Key Takeaways
- SAFEs are simpler - use them for most early raises
- Notes have more risk - maturity date creates pressure
- Interest adds up - favor SAFEs to avoid extra dilution
- Caps matter more than discounts - negotiate the cap hard
- Track everything - multiple instruments get complex fast
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