SAFE vs Convertible Note: A Plain-English Guide
How SAFEs and convertible notes work, how they convert, and the questions to ask before choosing one for a pre-seed round.
Most pre-seed rounds are not priced. Instead, investors put in money now in exchange for shares later, using either a SAFE or a convertible note. Both convert into equity at your next priced round. They differ in what happens if that round never comes.
This is an educational overview. Terms vary and local law matters, so have a qualified lawyer review any document you sign.
The short version
| SAFE | Convertible note | |
|---|---|---|
| What it is | A right to future equity | A loan that converts into equity |
| Interest | None | Usually accrues |
| Maturity date | None | Yes, often 12–24 months |
| Converts at | Next priced round, usually with a cap and/or discount | Next priced round, usually with a cap and/or discount |
| If no priced round happens | Stays outstanding until a conversion or liquidity event | Becomes due at maturity unless extended or converted |
| Paperwork | Short, standardised templates exist | Longer, more negotiated |
The SAFE (Simple Agreement for Future Equity) was introduced by Y Combinator in 2013, and the post-money version followed in 2018. It became popular because it is short and quick to close.
How conversion works
Both instruments usually include one or both of:
- Valuation cap: the maximum valuation the money converts at.
- Discount: a percentage off the next round's share price, often in the 10–25% range.
If your next round is priced above the cap, early investors convert at the cap and get more shares per dollar than new investors. That is their reward for taking early risk.
The trap: dilution you can't see
Unpriced instruments don't show up in your cap table as shares until they convert. Founders who stack several SAFEs with different caps are often surprised by how much ownership they give up at the seed round. Before you sign, model a pro forma cap table: what you own after the next round once every SAFE and note converts and the option pool is topped up.
Questions to ask before choosing
- Is this a pre-money or post-money SAFE, and which do my investors expect?
- What cap and discount are standard for my stage and market?
- How will every outstanding instrument convert at my next round?
- Does my jurisdiction treat this instrument the way the template assumes?
- What do my existing shareholder documents require for issuing it?
Questions founders ask
Is a SAFE debt?
No. A SAFE is a contractual right to future equity. It has no interest rate and no maturity date, unlike a convertible note, which is a loan.
Can I use a SAFE outside the United States?
SAFEs are used in many countries, including across Asia, but enforceability, tax treatment and company law differ. Ask a lawyer in your jurisdiction before signing.
What is a valuation cap?
The maximum valuation at which the investment converts into shares. It protects early investors if your next round is priced much higher.
Should I raise on a SAFE or a priced round?
SAFEs and notes are faster and cheaper for small early rounds. Priced rounds set a valuation and usually come with more negotiated terms; they are more common once a company raises larger amounts.
Educational content only. Not investment, legal or tax advice. Fundraising rules differ by country; check documents with a qualified lawyer.