What’s Best for Early-Stage Startups?

SAFE vs Convertible Note vs Equity: What’s Best for Early-Stage Startups?

Choosing the right fundraising structure is one of the most important decisions an early-stage founder makes. The three most common instruments are:

• SAFE (Simple Agreement for Future Equity)

• Convertible Note

• Priced Equity Round

Each comes with trade-offs around speed, legal cost, valuation, and investor expectations. This guide breaks down how they work — and when to use each.

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1. SAFE (Simple Agreement for Future Equity)

What it is:
A SAFE is a flexible, founder-friendly contract that gives investors the right to convert their investment into equity at a later date — usually during your next priced round.

Key terms include:

• Valuation cap: Max valuation the SAFE will convert at

• Discount: % discount on future share price

• MFN/Pro-rata rights (optional)

Pros:

• Very fast and cheap to issue

• No interest or maturity date

• Widely accepted by accelerators (e.g., Y Combinator)

Cons:

• No debt protections for investors

• Can stack on your cap table if not managed well

Best for:
Pre-seed or seed rounds under $1M–$3M, where speed and simplicity matter.

✅ Example Use:
Raising $500K on a $5M cap SAFE with 20% discount.

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2. Convertible Notes

What it is:
A convertible note is a loan that converts to equity, typically at the next round. It includes interest and a maturity date.

Key terms:

• Interest rate (usually 4–8%)

• Maturity date (often 12–24 months)

• Valuation cap and/or discount

Pros:

• Familiar to investors who want repayment protections

• Includes both debt and equity-like features

Cons:

• Adds complexity: interest accrual, legal oversight

• Investors could demand repayment at maturity

Best for:
Rounds with more sophisticated angels or when investor wants some downside protection.

✅ Example Use:
$250K convertible note, 6% interest, $6M cap, 18-month maturity.

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3. Priced Equity Rounds

What it is:
You sell shares (usually Preferred Stock) at a fixed price per share with a formal valuation and full legal documentation.

Key terms:

• Valuation

• Share class & rights

• Investor rights (voting, liquidation preference, etc.)

Pros:

• Clear ownership stakes from day one

• Cleaner cap table for future rounds

• Preferred by institutional VCs

Cons:

• Higher legal costs ($15K–$50K)

• Slower process — can take months

Best for:
Seed+ or Series A rounds with professional investors, raising $2M+.

✅ Example Use:
$3M raise on a $12M pre-money valuation in exchange for 20% equity.

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Comparison Table

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Which One Should You Use?

If you’re unsure, start with a SAFE — it’s now the default in the U.S. pre-seed ecosystem.