Convertible Notes vs. SAFEs — What Startups Need to Know

💼 What Are Convertible Notes and SAFEs?

Both Convertible Notes and SAFEs (Simple Agreements for Future Equity) are popular early-stage financing tools that allow startups to raise money before a priced equity round.

They are non-equity at the time of signing, but convert into equity later — usually at the next fundraising round. However, their structure and implications are quite different.

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🧾 What Is a Convertible Note?

A convertible note is essentially a short-term debt that converts into equity under predefined conditions.

Key features:

• Interest rate (e.g., 5% annual)

• Maturity date (repayment or conversion deadline)

• Often includes valuation cap and/or discount rate

💡 It behaves like a loan until it converts into shares.

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📄 What Is a SAFE?

A SAFE is not debt — it’s a contractual agreement to convert an investor’s money into equity at a future financing round.

Key features:

• No interest or maturity date

• Includes a valuation cap, discount, or both

• Simpler and founder-friendly

Developed by Y Combinator in 2013 to streamline early-stage investing.

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⚖️ Key Differences at a Glance

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🔍 Why Startups Choose One Over the Other

Convertible Notes:

• Used before SAFEs became mainstream

• Some investors still prefer them due to familiarity

• May suit later-stage pre-Series A rounds

SAFEs:

• Simpler for founders

• No risk of debt or repayment

• Better aligned with early-stage goals

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💡 Example Scenarios

Scenario A: Convertible Note

Startup raises $200K using a convertible note with:

• 6% interest

• $5M valuation cap

• 20% discount

• 18-month maturity

If they raise a priced round in 12 months, the investor’s note converts with either the cap or discount (whichever yields a lower price per share).

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Scenario B: SAFE

Startup raises $150K via a SAFE:

• No interest

• $4M valuation cap

When they raise a Series A at $8M post-money, SAFE holders convert at the $4M cap price — getting double the equity than priced investors.

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🧠 What Investors Think

Convertible Notes:

• Provide legal protections via maturity and interest

• Familiar to traditional angels

SAFEs:

• Faster to execute

• Growing acceptance with tech-savvy angels and micro VCs

• No fixed timeline = risk for investors if startup delays next round

Pro tip: Some investors now request “post-money” SAFEs for more clarity on ownership dilution.

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✅ Pros & Cons

Convertible Notes

✅ Pros:

• Well-understood legal structure

• Gives investors downside protection

❌ Cons:

• Can be legally complex

• Creates debt on your books

SAFEs

✅ Pros:

• Simple and fast

• No debt risk

• More founder-friendly

❌ Cons:

• No set deadline = may leave investors in limbo

• Requires education for traditional investors

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🔐 Legal Considerations

• Always consult with a startup-savvy attorney

• SAFEs vary by version — Y Combinator has 4+ variations (pre-money, post-money, etc.)

• Convertible notes require close monitoring of maturity and interest

Sources:

• Y Combinator SAFE Documentation

• Cooley GO Convertible Notes Guide

• Startup Company Lawyer

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🧭 Which Is Best for Your Startup?

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📌 Final Thought

Whether you choose a SAFE or a convertible note, what matters most is clear communication with investors and alignment on long-term fundraising strategy.

Understanding the nuances now will save you time, stress, and legal costs down the road.