Convertible Notes vs. SAFEs: A Founder's Guide to Choosing the Right Pre-Priced Instrument
Before a startup can price a round, it needs money. The pre-priced instrument that bridges the gap is either a convertible note or a SAFE (Simple Agreement for Future Equity). To a first-time founder they look almost interchangeable — a short document, a valuation cap, a discount, and a promise to convert into equity at the next priced round.
They are not interchangeable. The differences matter to your cap table, your runway, and your relationship with the investor when the priced round is late.
A convertible note is debt that converts to equity. It accrues interest, it has a maturity date, and if the priced round never happens, the noteholder can demand repayment.
A SAFE is not debt. It is a contractual right to future equity. No interest, no maturity, no repayment obligation.
Everything else in this guide is a consequence of that single distinction.
Both instruments are defined by roughly the same six variables. Learn to read all six on any term sheet you get. 1. Valuation cap
The maximum valuation at which the instrument converts to equity at the next priced round. If the note or SAFE has a $10M cap and the Series A prices at $20M, the noteholder converts as if they had invested at $10M — they get twice as many shares.
Caps sit on both instruments. There is nothing structurally different here. 2. Discount
A percentage discount to the next round's price. Standard is 10–25%. A 20% discount on a $2.00 Series A share price means the noteholder converts at $1.60.
Most instruments have both a cap and a discount, and convert on whichever gives the investor a better price. Some early-stage deals have only a cap (common in Y Combinator-style SAFEs) or only a discount (rare, and usually a bad deal for the investor). 3. Interest rate
Only on convertible notes. Typically 4–8% simple interest. The interest accrues over the life of the note and converts along with the principal at the next round.
On…
