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.
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.
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).
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 a $500K note at 6% for 18 months, roughly $45K of accrued interest converts to equity. That is dilution founders forget to model.
Only on convertible notes. Typically 18–24 months. At maturity, if no priced round has happened, the noteholder can:
Demand repayment (usually not what they want — the company rarely has the cash).
Convert at the cap into common stock or a synthetic preferred series.
Maturity is where the "convertible note as debt" reality bites. It is a hard deadline that puts pressure on the founder to raise a priced round even if the timing is wrong.
SAFEs have no maturity. They sit on the cap table until the next priced round, whenever that is.
If the company issues a later SAFE or note with better terms (lower cap, higher discount), an MFN clause lets the earlier investor swap into those terms. Standard on both instruments. Almost always fair. Grant it.
The right to participate in the next priced round to maintain ownership. Common on notes. On SAFEs it depends on the version:
Y Combinator's original (2013) SAFE included pro-rata by default.
Y Combinator's post-money SAFE (2018) removes pro-rata from the base document; pro-rata is granted separately via a side letter.
In 2018 Y Combinator rewrote the SAFE from a pre-money to a post-money instrument. Every founder using a SAFE needs to understand what changed.
Pre-money SAFE: the cap is a pre-money valuation. When the priced round happens, the SAFE holder's ownership is calculated before the new money comes in. Existing SAFEs dilute each other.
Post-money SAFE: the cap is a post-money valuation, including all SAFEs but excluding the new priced round money. The SAFE holder's ownership is calculated before the priced round but after all other SAFEs. Their percentage is locked in on day one.
With post-money SAFEs, founders can calculate exact dilution the moment the SAFE is signed. What you see is what you get. But total dilution across multiple SAFEs adds up faster than founders expect — because each SAFE holder's percentage is fixed, all the dilution from later SAFEs is absorbed by the founders and any pre-money SAFE holders.
With pre-money SAFEs, later investors dilute earlier ones alongside the founders. Total founder dilution is often lower, but the math is harder to read.
If a fund hands you a "SAFE" without specifying which version, ask. If they hand you a post-money SAFE at a $6M cap and you plan to raise $2M in SAFEs, that is roughly 33% dilution to founders and existing common, before the priced round even prices.
An investor insists on it. Some family offices, angel groups, and traditional lenders are more comfortable with debt.
You want a hard deadline to force yourself to a priced round. Maturity is a feature, not a bug, if you have a real timeline.
You want interest in the instrument to signal downside protection to the investor without giving up cap or discount.
You are outside the US. SAFEs work best under Delaware / US law. Many jurisdictions treat notes with more established legal precedent.
You are raising in the US early-stage ecosystem and want fast, cheap, standardized paper.
You cannot commit to a priced round timeline. No maturity means no ticking clock.
You want to avoid balance-sheet debt for regulatory or optics reasons.
You are stacking multiple investors — the standardization saves legal fees on each new close.
1. Ignoring interest in the dilution model. Two years at 6% is another 12% of principal converting. 2. Setting maturity too short. 12 months is aggressive. 18–24 is standard. Longer is fine. 3. Not preparing for the maturity conversation. If the priced round is late, sit with the noteholders before maturity, not after.
1. Not knowing which SAFE version you are on. Post-money vs. pre-money is the single biggest hidden variable. 2. Stacking too many SAFEs at different caps. By the priced round, the cap table is a mess of conversion math and everyone is unhappy. 3. Believing "SAFE = simple = no cap table impact today." The SAFE is real ownership on the day it is signed. Model it.
Every time you sign a new note or SAFE, update a single fully-diluted cap table spreadsheet the same day, with the new instrument modeled at both the cap and the target priced-round valuation. Show the founder ownership row.
If that row drops below where you want to be at the priced round, you have raised too much on paper that is not equity. Slow down, raise the cap, or price the round.
