SAFE vs. Convertible Note: A Complete Guide for Early-Stage Founders

First-time founders agonize over SAFEs vs. convertible notes. The mechanics look similar, with both deferring valuation and converting at your next priced round. But the differences emerge later, like a cap table showing 15 percent gone at Series A instead of the 10 percent you expected, a maturity date hitting while you're still three months from Series A or those three small SAFEs stacking to twice the dilution you modeled.

These differences have driven most founders toward one clear answer. According to Carta, 90 percent of pre-seed rounds now use SAFEs. The question is whether you're in that 90 percent or the 10 percent where convertible notes make more sense. This guide breaks down how each instrument works, when to use which one and how to avoid the mistakes we've repeatedly seen founders make.

What is a SAFE Note?

A SAFE or a Simple Agreement for Future Equity is an agreement where investors give you money today in exchange for equity when you close your next priced round. Unlike convertible notes, SAFEs aren't debt. They don't carry any interest rates, maturity dates or repayment obligations.

The valuation cap sets the maximum company valuation at which the investor's money converts to equity. If your Series A prices at $10 million but your SAFE has a $5 million cap, the SAFE investor converts as if your company were only valued at $5 million, receiving twice as many shares. This protects early investors who took risks before you had traction.

Standard SAFE Variants and When to Use Them

There are four standard SAFE variants:

1. Valuation cap only: Most common and gives you the most negotiating power.
2. Discount only: Provides a percentage reduction on the Series A price when you're confident your next round will price high. This means SAFE holders buy shares cheaper than Series A investors.
3. Valuation cap plus discount: Offers dual protection and typically appears when investors have more leverage.
4. Most Favored Nation (MFN): If you issue future SAFEs with better terms (lower cap, higher discount), this SAFE automatically gets upgraded to match.

Say you issue a SAFE with a $5M cap and 20 percent discount, then raise Series A at $10M. Converting using the cap (cap-based conversion) gives investors shares at a $5M valuation. Converting using the discount (discount-based conversion) gives investors shares at an $8M valuation. Investors get the better deal (the cap) because when both exist, they get whichever method gives them more shares.

Post-money SAFEs, where the cap represents your valuation after the SAFE converts, make this math predictable per SAFE. Each SAFE's dilution is fixed, though you'll still need to model total dilution when stacking multiple instruments.

When SAFEs Convert to Equity

SAFEs convert into equity when a "triggering event" occurs, most commonly a priced equity financing round. Other triggers include liquidity events like acquisitions or IPOs. In equity financing rounds, the conversion happens automatically without investor consent.

Unlike convertible notes, SAFEs have no maturity date and never trigger repayment obligations. If no triggering event occurs, the SAFE remains outstanding indefinitely.

What is a Convertible Note?

A convertible note is a short-term debt instrument that converts into equity at a later date. You're taking a loan that turns into shares instead of being repaid in cash. These notes include valuation caps, discount rates, interest accrual (typically four percent to eight percent annually) and maturity dates commonly 18 to 24 months.

Convertible Note Terms and How They Work Together

Convertible notes include interconnected terms that determine your total dilution. Interest rates run between four percent to eight percent annually, with seven percent as the median. Maturity dates typically span 18 to 36 months. Valuation caps for pre-seed rounds usually fall in the $6 to $15M range, and discount rates run 10 percent to 20 percent.

Suppose you raise $300K on a convertible note with a $6M cap, 20 percent discount, five percent annual interest and 24-month maturity. After two years, you've accrued $30K in interest. Your total converting amount is now $330K instead of $300K.

When your Series A prices at $12M, the cap-based conversion at $6M gives investors better terms than the discount-based conversion at $9.6M. The note converts at the $6M cap. That extra $30K in interest means investors get about 10 percent more shares than the principal amount alone would have given them.

When Convertible Notes Convert to Equity

Convertible notes convert when a startup raises a qualified financing round (one that meets the minimum raise amount specified in the note terms, typically $1M to $2M), with both principal and accrued interest converting at the negotiated terms. The conversion method at maturity should be specified in the initial negotiation rather than leaving it ambiguous. When notes mature without a conversion event, an extension is the most common outcome.

How SAFEs and Convertible Notes Differ

SAFEs and convertible notes differ in four ways: debt classification, interest mechanics, maturity obligations and legal complexity.

Debt vs. Equity Classification

SAFEs are equity agreements with no debt obligations, interest accrual or maturity dates. Convertible notes are debt instruments that appear as liabilities on balance sheets and include mandatory maturity dates. When you issue convertible notes, you carry debt on your books until conversion. SAFEs have no balance sheet impact until the triggering event.

Interest Compounds Dilution

SAFEs carry zero interest. Convertible notes typically accrue interest at four to eight percent annually. On a $500,000 convertible note at five percent interest over 24 months, founders accrue $50,000 in additional interest that converts to equity, roughly 10 percent more dilution beyond the principal amount.

Maturity Creates Pressure Points

SAFEs have no maturity date and remain outstanding indefinitely until a triggering event occurs. Convertible notes typically mature in 18 to 36 months. Extensions are common when notes mature without conversion. The catch is that you're negotiating that extension from a position of weakness, while investors hold leverage.

Legal Costs Differ Significantly

Standard SAFE templates require minimal customization, typically costing up to $2K in legal fees. Convertible notes require more extensive documentation covering interest calculations, maturity provisions and default scenarios, often running $2 to $5K in legal costs.

The simplicity of SAFEs explains why 90 percent of pre-seed rounds now use them. Convertible notes make sense when their structured timeline and debt protections provide specific advantages.

When SAFEs Work Better Than Convertible Notes

SAFEs dominate pre-seed rounds because they match the speed and simplicity early-stage founders need. There are four situations where SAFEs beat convertible notes:

• Pre-seed and early seed rounds ($50K to $500K): When you're raising from angels to build your MVP and reach initial traction, the overhead of debt instruments rarely makes sense. A founder raising $200K from three angels to fund six months of development doesn't need interest calculations or maturity clauses.
• Uncertain valuations: When you're pre-product or pre-revenue and can't establish a credible valuation, SAFEs let you defer that conversation. A technical founder with a prototype but no users yet can raise on a SAFE without defending a $5M valuation.
• Quick fundraising timelines: Standard templates require minimal customization, letting you close in days rather than weeks. When a key engineer gives you two weeks to match a competing offer, closing a SAFE in 48 hours beats negotiating convertible note terms.
• Investor preference for simplicity: Most angel investors and early-stage funds now prefer SAFEs. When your target investors are former founders who've raised on SAFEs themselves, they expect the same instrument.

Post-money SAFEs provide predictable dilution. A $500K SAFE with a $10M cap always represents five percent ownership. Unlike convertible notes, SAFEs eliminate the pressure of looming maturity deadlines.

When Convertible Notes Work Better Than SAFEs

Convertible notes make sense in situations where their structure provides advantages over SAFEs. There are three scenarios where convertible notes beat SAFEs:

• Bridging financing between priced rounds: When you're raising $500K to $2M to extend runway between your Series A and Series B, the structured timeline signals commitment to closing the next round. You've already done one priced round, so the maturity date serves as accountability rather than pressure.
• Meeting institutional investor requirements: Some institutional investors require debt protections, even though most early-stage investors now prefer SAFEs. When a strategic corporate investor insists on convertible notes as policy, you adapt or walk away.
• Expecting near-term priced rounds: When you're three months from closing Series A and need $300K to bridge the gap, a six-month convertible note with a maturity date aligned to your Series A timeline makes the temporary nature explicit.

Convertible notes also work better when you need customized terms beyond standard templates: unusual investor rights, specific milestone-based triggers or complex conversion mechanics. According to Equitylist, this added structure makes sense for bridge situations.

Tax and Legal Implications

SAFEs create zero tax paperwork until conversion. The IRS treats them as variable prepaid forward contracts with no tax consequences and no annual reporting requirements.

Convertible notes, on the other hand, create ongoing compliance work. You must file annual Form 1099s for each investor to report their accrued interest income, adding paperwork that pre-seed founders with limited bandwidth often overlook. Worse, under IRC §163(l), you cannot deduct that interest expense even though your investors pay tax on it. This creates pure tax cost with no offsetting benefit.

Both instruments count as securities under federal and state laws. You should work with startup counsel who knows these instruments to avoid any compliance mistakes.

How Each Instrument Affects Founder Dilution

Post-money SAFEs make dilution predictable. A $500K SAFE with a $10M cap always represents five percent of your company. The math is straightforward, and you know exactly what you're giving up when you sign.

Convertible notes add complexity through accrued interest. That $300K note at five percent annual interest becomes $330K after 24 months. The extra $30K converts to equity alongside the principal, giving investors about 10 percent more shares than the original loan amount. This compounds when you stack multiple notes or combine notes with SAFEs.

The consequence: your cap table at Series A looks different from what you expected. You thought you raised $900K across three instruments and gave up nine percent, but you actually gave up 12 percent after interest and conversion mechanics played out. Tools like Carta's SAFE Calculator help model the real dilution before you commit to terms.

Common Mistakes Founders Make With These Instruments

Three cap table mistakes happen repeatedly across seed rounds:

• Stacking too many SAFEs: You raise $200K on a SAFE at a $5M cap, then $300K at a $6M cap, then $400K at an $8M cap. Your Series A prices at $15M and all three convert, leaving you with 14 percent dilution instead of the six to seven percent you expected. You should model your cumulative dilution across all SAFEs before signing the third or fourth instrument.
• Ignoring maturity date obligations: You issue a convertible note with an 18-month maturity expecting to raise Series A in 12 months. Eighteen months later, you're still three months away from closing and now negotiating an extension from a position of weakness while burning your last cash. Give yourself at least 24 months on maturity dates to avoid this trap.
• Modeling only one conversion scenario: You model the cap-based conversion showing eight percent dilution but skip modeling the discount-based conversion. When your Series A prices lower than expected, the discount suddenly gives investors better terms than the cap and you're giving up 12 percent instead of eight percent. Always run both scenarios before signing — the difference can swing your dilution by several percentage points.

These mistakes share a common fix: model the full dilution impact before signing anything. You'll negotiate better terms and avoid surprises at conversion.

Make Your Choice Based on Stage and Investor Dynamics

The choice comes down to your stage and investor requirements. Most pre-seed raises ($50K to $500K from angels, pre-product or pre-revenue) work better with SAFEs. Bridge rounds between priced financings or situations where institutional investors require debt instruments call for convertible notes.

Before you sign anything, model both cap-based and discount-based conversion scenarios. We've worked with hundreds of pre-seed and seed founders since 1970, from DoorDash to Mercury to Vercel. Founders who understand their cap table implications before signing negotiate better terms and avoid surprises at Series A.

At CRV, we back technical founders building companies in AI, cybersecurity, developer tools and infrastructure at the earliest stages. If you're navigating your first raise and want to talk through your options, reach out to our team today.

Frequently Asked Questions About SAFEs vs Convertible Notes

Which is better for startups, SAFE or convertible note?

SAFEs dominate pre-seed and early seed rounds, with 90 percent of pre-seed deals in Q1 2025 using SAFEs. Use a SAFE when you're raising $50K to $500K from angels, uncertain about valuation and want to avoid debt obligations. Use a convertible note when you're raising bridge capital between priced rounds or when institutional investors require debt protections.

Do investors prefer SAFE notes or convertible notes?

Most angel investors and early-stage funds prefer SAFEs because they're simpler and faster to close. Some institutional investors still require convertible notes for debt protections. Ask your target investors about their preference before structuring your round rather than assuming.

What happens if a SAFE note never converts?

SAFEs have no maturity date and never trigger repayment obligations. If no triggering event occurs (priced round, acquisition, IPO), the SAFE stays outstanding indefinitely. SAFE holders get dissolution preference rights if the company shuts down, but they don't get voting rights until conversion happens.

Can you use both SAFEs and convertible notes in the same round?

You can, but it creates complexity. Convertible notes convert before SAFEs due to legal priority as debt instruments, affecting dilution calculations. Mixing instruments needs careful structuring to avoid any confusion or friction. Most founders stick to one instrument type per round unless investor requirements force the mix.

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