Convertible Notes vs. SAFEs — Pros, Cons, and Founder Tips

If you’re raising money at the pre-seed or seed stage, you’ve likely heard these two terms tossed around:

Convertible Note
SAFE (Simple Agreement for Future Equity)

They’re both popular alternatives to a priced equity round — especially before a company has a valuation.

But which one is better? And why do some founders and investors prefer one over the other?

This deep-dive breaks it all down — in plain language, with founder insights and legal considerations.

What Are They? Quick Definitions

✅ Convertible Note

A convertible note is a loan that converts into equity later — typically at the next funding round.

It includes an interest rate
It has a maturity date
It may include a valuation cap or discount

💡 Essentially: Investors give you a loan today, and they get shares later — often at a discount.

✅ SAFE (Simple Agreement for Future Equity)

A SAFE is not a loan — it’s a promise to issue shares at a future date, usually when you raise your next round.

No interest
No maturity date
Created by Y Combinator in 2013 to simplify early-stage deals

💡 It’s a “you’ll get equity later” agreement, with fewer moving parts than a convertible note.

What Do They Have in Common?

Delay valuation negotiations
Convert into equity in a future round
Help you close early capital faster
Are used at pre-seed or seed (before Series A)

Key Differences at a Glance

Feature	SAFE	Convertible Note
Legal Type	Contract	Debt
Interest Rate	None	2%–8%
Maturity Date	None	Typically 12–24 months
Valuation Cap	Optional	Optional
Discount Rate	Optional	Optional
Investor Rights	Limited	May include more rights
Simplicity	Simpler	More complex
Enforceability	Less pressure	Debt can be enforced

Benefits of SAFEs (Founder Perspective)

✅ No debt to repay — No risk of investor calling it in
✅ No maturity clock — Less pressure to raise quickly
✅ Lower legal fees — Simple, standard templates
✅ Founder-friendly defaults — Created for speed and flexibility

🔗 Official SAFE template: Y Combinator SAFE Generator

Benefits of Convertible Notes

✅ Familiar to more investors — Especially outside Silicon Valley
✅ Allows negotiation leverage — Can include interest/maturity to push next round
✅ Potential for early exit bonus — Investors may get better terms in M&A
✅ Stronger protection clauses — If needed

Risks and Drawbacks (Both Instruments)

Too many SAFEs/notes = cap table mess
If you raise in multiple small rounds, you could end up over-diluted.
Valuation Cap misunderstanding
Investors may push for lower caps to gain more equity later.
No incentive to close fast
With SAFEs, no maturity = investors may wait longer for liquidity.

When Should You Use a SAFE?

✅ You’re raising from angels or early-stage investors who care about simplicity
✅ You want to avoid legal costs and debt complications
✅ You’re confident you’ll raise a priced round soon

🧠 Many top accelerators (YC, Techstars) recommend SAFEs for pre-seed or friends-and-family rounds.

When Should You Use a Convertible Note?

✅ You’re raising from investors who expect debt terms
✅ You want a maturity date to trigger conversion
✅ You’re open to more complex terms in exchange for flexibility

Some investors prefer convertible notes because they’re legally enforceable, with interest and a deadline.

What About Post-Money SAFEs?

In 2018, Y Combinator introduced the Post-Money SAFE.

It lets you:

Predict dilution more accurately
Include a valuation cap
Avoid the uncertainty of multiple notes

🧠 If you’re raising multiple SAFEs over time, use post-money SAFEs to control dilution better.

📍 Resource: Y Combinator’s Post-Money SAFE Guide

How Do These Instruments Convert?

When you raise your next priced round (usually Series A), the notes or SAFEs convert into equity using:

Valuation Cap — e.g., if your cap is $5M and the round is at $10M, early investors get more shares
Discount Rate — e.g., 20% off the Series A price
Most-Favored Nation Clauses — Ensures early investors get best deal terms

🧮 Example:
If your next round is priced at $10M and your SAFE has a $5M cap, the SAFE holder gets 2x the equity compared to Series A investors.

How Much Equity Will a SAFE/Note Convert Into?

Use this formula:

Or use calculators like:

Carta SAFE Calculator
SeedLegals Convertible Calculator

Best Practices for Founders

✅ Use standard templates (YC, SeedSAFE, Cooley GO)
✅ Keep your cap table organized — use tools like Carta, Pulley
✅ Limit number of overlapping instruments
✅ Include caps/discounts transparently
✅ Convert SAFEs/notes into equity as soon as possible

Legal and Tax Considerations

SAFEs aren’t technically debt — But they can create phantom income in some exit scenarios
Convertible notes may trigger interest income
Consult with a startup-savvy attorney or CPA

📍 Reference:

Cooley GO SAFEs Guide
Wilson Sonsini Term Sheet Navigator

Conclusion: Choose Based on Simplicity, Fit, and Investor Preference

There’s no one-size-fits-all.

Use a SAFE when:

You want fast, clean capital
You’re raising from founder-friendly angels
You value simplicity and are on a tight legal budget

Use a convertible note when:

Investors expect debt-like terms
You want a maturity date to convert or repay

You’re building optionality into your raise