SAFE vs Convertible Note: How They Differ and Which to Choose

SAFEs and convertible notes are the two most common ways early-stage startups raise money before a priced round. Both let you take investment now and set the price later, when a larger round values the company. The key difference: a convertible note is debt, with interest and a repayment date. A SAFE is not debt at all.

This guide explains how each one works, how they convert into shares, and how to decide which fits your raise.

What is a SAFE?

A SAFE, or Simple Agreement for Future Equity, is a contract that gives an investor the right to receive shares in a future priced round. Y Combinator introduced it in 2013 and released the post-money version in 2018, which is now the standard for US pre-seed and seed rounds.

A SAFE has no interest rate and no maturity date. The investor is not a lender and, until conversion, is not a shareholder. If the company never raises a priced round and is not acquired, the SAFE may never convert.

What is a convertible note?

A convertible note is a short-term loan that converts into equity at a later financing instead of being repaid in cash. Because it is debt, it carries:

• An interest rate, commonly a few percent a year, which accrues and usually converts into shares along with the principal.
• A maturity date, often 12 to 24 months out. If the company has not raised a qualifying round by then, the note is technically due.

The note sits on your balance sheet as a liability until it converts.

Side by side

Term	SAFE	Convertible note
Legal form	Contract for future equity	Debt
Interest	None	Yes, accrues until conversion
Maturity date	None	Yes, typically 12 to 24 months
Valuation cap	Common	Common
Discount	Sometimes	Common
Repayment risk	No scheduled repayment; cash rights may arise on a sale or dissolution	Possible at maturity
Paperwork	Short, standardized	Longer, more negotiated
Typical use	US pre-seed and seed	Bridge rounds, some angel and non-US rounds

How conversion works: cap and discount

Conversion depends on the signed instrument. Current YC post-money SAFE forms generally use a valuation cap or a discount, rather than both. Some negotiated SAFEs and convertible notes include both; where the agreement provides for it, the investor receives the lower conversion price.

• Valuation cap: the maximum valuation at which the investment converts. If the round prices the company above the cap, the investor converts as if the valuation were the cap.
• Discount: a percentage off the price new investors pay, often 10% to 25%.

Illustrative example using a negotiated instrument with both terms. An investor puts $500,000 into a SAFE with an $8 million cap and a 20% discount. The Series A prices shares at $2.00. The discount gives a price of $1.60. Suppose the cap works out to $1.20 per share. The investor converts at $1.20, the lower price, and receives about 416,667 shares.

With a convertible note on the same terms, the accrued interest is added to the $500,000 before conversion, so the investor receives slightly more shares.

Post-money vs pre-money SAFEs

The current YC SAFE is a post-money SAFE. The cap is measured after all the SAFE money is counted, so each investor's ownership is fixed and easy to calculate: $500,000 on a $10 million post-money cap is 5% of the company before the priced round. The trade-off is that the founders absorb all the dilution from every additional SAFE they sign.

Older pre-money SAFEs made ownership harder to predict, because each new SAFE diluted earlier SAFE holders too. Know which version you are signing.

Hidden dilution: why SAFEs belong on your cap table

Because SAFEs are not shares, founders often leave them off the cap table. That is a mistake. Several SAFEs stacked at different caps can convert into a much larger stake than founders expect. Model them on a fully diluted basis every time you sign one. Our cap table guide shows how.

Other terms to watch

• MFN clause: most favored nation. If you later issue SAFEs on better terms, MFN holders can adopt them.
• Pro rata rights: often granted in a side letter, giving the investor the right to invest in the next round to keep their percentage.
• Qualified financing threshold: in notes, the minimum round size that triggers automatic conversion.
• Change of control: what happens if the company is acquired before conversion. The payout or conversion rights depend on the instrument. A standard YC SAFE generally provides the greater of its purchase amount or its as-converted value on a liquidity event, subject to payment priority and available proceeds.

Which should you use?

For most US pre-seed and seed rounds, the post-money SAFE is the default. It is short, investors know it, and it has no scheduled repayment obligation. Its liquidity and dissolution provisions still matter.

A convertible note makes sense when an investor requires it, when you are raising a short bridge between priced rounds, or when you are raising outside the US where SAFEs are less common. If you sign a note, track the maturity date closely and plan how you will extend it if your next round is late.

Whichever you use, keep the signed instruments, any side letters, and the board approval for the issuance together. These are among the documents investors ask for at seed, and they are checked line by line in diligence after the term sheet.

Keep every SAFE and note accounted for

DocChief reads your SAFEs, notes and side letters, extracts their caps, discounts and holders, and checks them against your cap table, so nothing is missing when your priced round arrives. See how it works.

For the source forms and conversion guidance, see Y Combinator’s SAFE documents.