SAFE vs Convertible Note: Complete 2026 Comparison Guide for Founders
Every startup founder raising their first round faces a critical decision: should you use a SAFE or a convertible note? This comprehensive guide breaks down both instruments, reveals what investors actually prefer, and helps you choose the right structure for your fundraise.
TL;DR: SAFE vs Convertible Note at a Glance
Choose a SAFE for speed, simplicity, and founder-friendly terms. Choose a convertible note when investors require debt protections, you need bridge financing, or you are working with traditional investors outside Silicon Valley.
2026 Market Reality: How Startups Are Raising
Current data on convertible instrument usage in startup fundraising
Complete Guide Contents
The choice between a SAFE (Simple Agreement for Future Equity) and a convertible note is one of the first major financial decisions startup founders face. While both instruments delay valuation negotiations and convert to equity in a future financing round, they differ significantly in their structure, terms, and implications for both founders and investors. Making the wrong choice can cost you time, money, and negotiating leverage in future rounds.
Since Y Combinator introduced the SAFE in 2013, it has become the dominant instrument for early-stage fundraising in Silicon Valley. However, convertible notes remain popular in many markets and situations. Understanding when and why to use each instrument is crucial for optimizing your fundraise while maintaining investor relationships.
The Founder's Dilemma
Sarah is raising $500K for her B2B SaaS startup. Three angel investors are interested, but one insists on a convertible note while the others prefer SAFEs. How should she structure the round, and what are the implications of each choice?
Quick Comparison: SAFE vs Convertible Note
| Feature | SAFE | Convertible Note |
|---|---|---|
| Legal Classification | Equity instrument | Debt instrument |
| Interest Rate | None | 5-8% annually |
| Maturity Date | None | 18-24 months typical |
| Valuation Cap | Yes (optional) | Yes (optional) |
| Discount | Yes (optional) | Yes (optional) |
| Documentation | 5-7 pages | 10-20 pages |
| Legal Costs | $0-5K | $5-15K |
| Closing Timeline | 2-4 weeks | 3-6 weeks |
| Repayment Risk | None | At maturity |
| Balance Sheet Treatment | Equity | Liability (debt) |
| Investor Seniority | Junior to debt | Senior to equity |
| Founder-Friendly Score | High | Medium |
Model Your Scenarios
Use our calculator to compare how SAFEs and convertible notes convert in your specific situation:
Try SAFE vs Convertible Note CalculatorWhat is a SAFE? (Simple Agreement for Future Equity)
A SAFE is a financing instrument created by Y Combinator in 2013 that allows investors to convert their investment into equity during a future priced financing round. Unlike convertible notes, SAFEs are not debt instruments - they do not accrue interest and have no maturity date.
The Origin Story: Why Y Combinator Created the SAFE
Before 2013, most early-stage startups raised money using convertible notes. Y Combinator's partners noticed that founders were wasting time and money negotiating interest rates, maturity dates, and other debt terms that rarely mattered in practice. Most notes converted during the next financing round - the debt terms existed mainly to satisfy legal requirements.
The SAFE was designed to strip away the unnecessary complexity of convertible notes while preserving the core benefit: deferring valuation negotiations until a priced round when more information is available. By eliminating interest and maturity dates, SAFEs allow founders to focus on building their company rather than managing debt obligations.
Types of SAFEs: Pre-Money vs Post-Money
Pre-Money SAFE (Original 2013 Version)
The original SAFE calculated conversion based on the pre-money capitalization of the company, excluding the SAFE itself. This created uncertainty when multiple SAFEs were outstanding because each SAFE holder's ownership depended on how many other SAFEs existed.
Problem: If you raised $500K via SAFEs, it was unclear how much the founders were being diluted until the priced round occurred.
Post-Money SAFE (2018 Version - Current Standard)
Y Combinator updated the SAFE in 2018 to use post-money valuation, which includes the SAFE investment in the cap calculation. This provides much clearer dilution math because each SAFE holder knows exactly what percentage they will own at conversion.
Example: A $100K investment on a $2M post-money cap guarantees the investor exactly 5% ownership at conversion, regardless of other SAFEs.
Core SAFE Terms Explained
- 1Valuation Cap: The maximum valuation at which the SAFE converts to equity. If your next round values the company higher than the cap, SAFE holders convert at the cap price, receiving more shares than later investors.
Example: $3M cap, Series A at $10M = SAFE converts at $3M price, getting 3.3x more shares per dollar than Series A investors.
- 2Discount: A percentage discount to the Series A price. Common discounts are 15-25%.
Example: 20% discount, Series A at $1.00/share = SAFE converts at $0.80/share.
- 3Most Favored Nation (MFN): Ensures early SAFE investors get the benefit of any better terms offered to later SAFE investors before the priced round.
Example: First investor gets MFN clause. Later investor gets $2M cap instead of $3M. First investor's cap automatically adjusts to $2M.
- 4Pro-Rata Rights: The right to invest in future rounds to maintain ownership percentage. Usually offered to investors above a certain threshold.
Example: $100K+ SAFE investors receive pro-rata rights to participate in Series A.
SAFE Best Practices
- Use the latest Y Combinator post-money SAFE templates (free at ycombinator.com/documents)
- Set valuation caps based on comparable companies and realistic Series A expectations
- Avoid raising on SAFEs at wildly different caps - it complicates the cap table
- Track all outstanding SAFEs carefully for accurate dilution modeling
- Consider side letters for major investors needing additional terms
What is a Convertible Note?
A convertible note is a debt instrument that converts into equity during a future financing round. Unlike SAFEs, convertible notes accrue interest over time and have a maturity date by which they must either convert or be repaid. They have been used for startup financing since the 1990s and remain the traditional choice for many investors.
How Convertible Notes Work
When an investor provides capital via a convertible note, they are making a loan to the company. The company owes the investor the principal amount plus accrued interest. However, instead of repaying this debt in cash, the expectation is that it will convert into equity when the company raises a priced round.
The conversion typically happens automatically when the company raises a "qualified financing" - usually defined as an equity round above a certain threshold (commonly $1M). At that point, the outstanding principal plus accrued interest converts into shares at either the valuation cap or at a discount to the round price, whichever gives the investor more shares.
Key Convertible Note Terms
- 1Principal Amount: The investment amount that will convert to equity (plus accrued interest).
- 2Interest Rate: Annual rate that accrues on the principal, typically 5-8%. Interest usually accrues but is not paid until conversion.
Example: $100K note at 7% for 18 months = $110,500 converts to equity.
- 3Maturity Date: The deadline by which the note must convert or be repaid, typically 18-24 months from issuance.
Warning: At maturity, investors can technically demand repayment if no conversion has occurred.
- 4Valuation Cap: Maximum conversion valuation, identical in function to SAFE caps.
- 5Discount: Percentage discount to the Series A price, typically 15-25%.
- 6Qualified Financing Threshold: Minimum amount the company must raise for automatic conversion, typically $1M+.
What Happens at Maturity?
The maturity date is the most significant risk difference between convertible notes and SAFEs. When a note matures without a qualified financing, several outcomes are possible:
Outcome 1: Extension (Most Common)
The investor agrees to extend the maturity date, often with modified terms like a lower cap or higher interest rate.
Outcome 2: Conversion at Maturity
The note converts to equity at the cap valuation or a negotiated valuation, even without a priced round.
Outcome 3: Repayment Demand (Rare)
The investor demands cash repayment of principal plus interest. This is uncommon but can happen with unfriendly investors.
Convertible Note Warning Signs
Watch out for these terms that can create problems:
- Short maturity dates (<18 months): Creates pressure to raise before ready
- High interest rates (>8%): Increases conversion amount significantly
- High qualified financing threshold: May force maturity conversion at unfavorable terms
- Aggressive change of control provisions: Can complicate acquisitions
- Board observer or information rights: Unusual for notes, adds overhead
Key Differences: SAFE vs Convertible Note Explained
1Interest Rates: The Silent Dilution Difference
SAFE: No Interest
SAFEs do not accrue interest. A $100K SAFE converts to exactly $100K worth of equity.
Convertible Note: Interest Accrues
A $100K note at 7% interest converts to $110.5K after 18 months, creating additional dilution.
Impact: On a $500K raise held for 2 years at 7% interest, the convertible note converts to $570K - an extra $70K in dilution compared to a SAFE.
2Maturity Dates: The Ticking Clock
SAFE: No Maturity
SAFEs have no maturity date. They sit on your cap table indefinitely until a conversion event occurs. This gives founders flexibility to time their next round optimally.
Convertible Note: Maturity Pressure
Notes typically mature in 18-24 months. If you have not raised a priced round by then, you must negotiate an extension, convert at potentially unfavorable terms, or face repayment demands.
Maturity Horror Story
A founder raised $300K on convertible notes with an 18-month maturity. When the notes matured, the company had traction but was not ready for a Series A. One investor demanded full repayment plus 8% interest ($324K), nearly bankrupting the company. The founder had to give that investor significantly better terms to agree to an extension.
3Documentation and Legal Costs
SAFE: Standardized and Simple
- 5-7 page standard document
- Y Combinator templates available free
- Minimal negotiation points
- Legal costs: $0-5K
- Can often close without lawyers
Convertible Note: More Complex
- 10-20 pages typical
- More negotiable terms
- Interest, maturity, default provisions
- Legal costs: $5-15K
- Usually requires legal review
4Legal and Accounting Classification
SAFE: Equity Treatment
- Not considered debt
- No liability on balance sheet
- No interest expense
- Cleaner financial statements
- Simpler accounting treatment
Convertible Note: Debt Treatment
- Classified as debt/liability
- Shows as liability on balance sheet
- Interest expense recognized
- May affect debt covenants
- Interest may be tax-deductible
When to Use a SAFE vs Convertible Note
When to Use a SAFE
- Speed:You need to close quickly (under 4 weeks) and cannot afford lengthy negotiations.
- Simplicity:You want standardized terms with minimal legal costs and negotiation points.
- Angel Investors:Your investors are angels, accelerators, or others familiar with SAFEs.
- Smaller Rounds:You are raising under $1M and want to minimize transaction costs.
- No Maturity Pressure:You want flexibility to time your next round without deadline pressure.
- Silicon Valley:You are raising from West Coast investors who expect and prefer SAFEs.
Ideal Scenario:
Pre-seed round of $250-750K from 3-8 angel investors who want to close in 2-3 weeks.
When to Use a Convertible Note
- Bridge Financing:You are raising a bridge round between priced rounds with existing investors.
- Traditional Investors:Your investors are family offices, corporates, or others who prefer debt structures.
- Outside Silicon Valley:You are raising in markets where convertible notes are more common and understood.
- Investor Protection:Investors require the downside protection of debt seniority and maturity rights.
- Larger Amounts:You are raising $1M+ where investors expect more formal structures.
- Tax Considerations:The company could benefit from interest deductibility or investors need specific tax treatment.
Ideal Scenario:
$500K-$1.5M bridge round from existing investors 6-9 months before Series A.
Decision Framework: Which Should You Choose?
Real-World Conversion Examples
Understanding how SAFEs and convertible notes convert in a priced round is critical. The mechanics are similar but the interest component in notes creates meaningful differences.
Example 1: SAFE Conversion in Series A
Starting Position:
- $250,000 SAFE investment
- $4M post-money valuation cap
- 20% discount
- SAFE held for 15 months
Series A Terms:
- $10M pre-money valuation
- $2M investment
- $12M post-money valuation
- Series A price: $1.00 per share
Conversion Calculation:
Cap Price: $4M cap / 10M shares = $0.40 per share
Discount Price: $1.00 x (1 - 20%) = $0.80 per share
SAFE converts at: $0.40 (cap is better)
Shares Received: $250,000 / $0.40 = 625,000 shares
Ownership: 625,000 / 12,625,000 = 4.95%
Result: SAFE investor gets 625,000 shares worth $625,000 at Series A price - a 2.5x paper return.
Example 2: Convertible Note Conversion in Series A
Starting Position:
- $250,000 convertible note principal
- $4M valuation cap
- 20% discount
- 7% annual interest rate
- Note held for 15 months (1.25 years)
Series A Terms (Same as SAFE example):
- $10M pre-money valuation
- $2M investment
- Series A price: $1.00 per share
Conversion Calculation:
Accrued Interest: $250,000 x 7% x 1.25 years = $21,875
Total Converting Amount: $250,000 + $21,875 = $271,875
Cap Price: $0.40 per share (same as SAFE)
Shares Received: $271,875 / $0.40 = 679,688 shares
Ownership: 679,688 / 12,679,688 = 5.36%
Result: Note investor gets 679,688 shares - 54,688 more shares than SAFE investor due to interest (8.7% more dilution to founders).
Side-by-Side: The Interest Impact
| Metric | SAFE | Convertible Note | Difference |
|---|---|---|---|
| Investment Amount | $250,000 | $250,000 | - |
| Converting Amount | $250,000 | $271,875 | +$21,875 |
| Shares Received | 625,000 | 679,688 | +54,688 |
| Ownership % | 4.95% | 5.36% | +0.41% |
| Founder Dilution Impact | Lower | Higher | 8.7% more dilution |
Key Insight: For a $250K investment held 15 months, the convertible note results in 8.7% more dilution than an equivalent SAFE. For larger amounts or longer hold periods, this difference grows substantially.
Detailed Pros and Cons Comparison
SAFE: Complete Pros and Cons
+ Advantages
- +No interest accrual: Converts at exact investment amount, minimizing dilution
- +No maturity date: No deadline pressure for next round
- +Standardized documents: Y Combinator templates reduce negotiation
- +Lower legal costs: $0-5K vs $5-15K for notes
- +Faster closing: 2-4 weeks typical vs 3-6 for notes
- +Not debt: Cleaner balance sheet, no liability recorded
- +Founder-friendly: Designed by Y Combinator for founders
- +Post-money clarity: Clear dilution with post-money SAFEs
- Disadvantages
- -Less investor protection: No debt seniority or maturity rights
- -Unfamiliar to some: Traditional investors may not know SAFEs
- -Unlimited dilution risk: Multiple SAFEs can stack up
- -No tax deduction: Company cannot deduct interest payments
- -Uncertainty for investors: No guaranteed liquidity event
- -Regional limitations: Less common outside Silicon Valley
- -409A complications: Can complicate stock option pricing
Convertible Note: Complete Pros and Cons
+ Advantages
- +Investor familiarity: Well-understood by traditional investors
- +Debt seniority: Investors senior to equity in liquidation
- +Maturity leverage: Creates conversion timeline certainty
- +Interest returns: Investors earn interest on investment
- +Tax benefits: Company can deduct interest expense
- +Bridge financing: Ideal structure for bridge rounds
- +Established precedent: Decades of legal history
- +Geographic acceptance: Works worldwide
- Disadvantages
- -Interest accrual: Increases dilution over time
- -Maturity pressure: Creates fundraising deadline stress
- -Repayment risk: Investors can demand cash at maturity
- -Complex documentation: More negotiation points
- -Higher legal costs: $5-15K typical
- -Slower closing: 3-6 weeks typical
- -Balance sheet liability: Shows as debt
- -Debt covenant issues: May restrict future borrowing
What Different Investors Prefer
Investor preferences vary significantly based on their background, investment thesis, and geographic location. Understanding these preferences helps you structure deals that close faster.
Investors Who Prefer SAFEs
- Angel Investors
Individual angels appreciate the simplicity and speed. Many invest small amounts and do not want to negotiate complex terms.
- Accelerators (YC, Techstars, etc.)
Y Combinator invented the SAFE and uses it for all its investments. Other accelerators have adopted it too.
- Micro VCs / Pre-Seed Funds
Funds making many small bets at the earliest stages prefer SAFEs for operational efficiency.
- Silicon Valley / SF Bay Area
SAFEs are the default in Silicon Valley - investors here expect them and may question why you are using a note.
- Repeat Startup Investors
Experienced startup investors who have done many deals prefer the efficiency of standardized SAFEs.
Investors Who Prefer Convertible Notes
- Traditional / Family Office Investors
Investors from traditional finance backgrounds prefer the familiarity of debt instruments and interest returns.
- Corporate Strategic Investors
Corporations often have policies requiring debt structures for early-stage investments.
- East Coast / Midwest Investors
Outside Silicon Valley, convertible notes remain the default and may be more familiar to local lawyers.
- International Investors
Many international markets have not adopted SAFEs, and notes have clearer legal standing globally.
- Existing Investors (Bridge Rounds)
When doing bridge rounds, existing VCs often prefer notes for cleaner Series A conversion.
How to Handle Mixed Investor Preferences
Option 1: Pick One Instrument for Everyone
The cleanest approach is to pick either SAFEs or notes and explain to all investors why this is your choice. Most professional investors will accept either if you have a clear rationale.
Option 2: Match Terms Exactly
If you must use both, ensure the cap, discount, and other economic terms are identical. The only difference should be interest and maturity on the notes.
Option 3: Accommodate with Side Letter
Sometimes a side letter can address specific investor concerns while keeping everyone on the same primary instrument. Discuss this with your lawyer.
Frequently Asked Questions
What is the main difference between a SAFE and a convertible note?
The main difference is that a SAFE is a simple equity instrument with no debt characteristics, while a convertible note is a debt instrument that converts to equity. SAFEs have no interest rates or maturity dates, making them simpler and more founder-friendly. Convertible notes accrue interest (typically 5-8%) and have maturity dates (usually 18-24 months) when repayment or conversion must occur.
Which is better for founders: SAFE or convertible note?
SAFEs are generally more founder-friendly because they have no maturity date pressure, no interest accrual, simpler documentation, and lower legal costs. However, the "better" choice depends on your specific situation: SAFEs work best for quick closes under $1M with angels, while convertible notes may be preferred for larger bridge rounds or when working with traditional investors who want debt protections.
Do SAFEs or convertible notes result in more dilution?
Convertible notes typically result in slightly more dilution due to accrued interest that converts along with the principal. For example, a $100K note at 7% interest held for 18 months converts at $110,500 value. SAFEs convert at exactly the investment amount. However, both instruments can have valuation caps and discounts that significantly impact final dilution.
What happens if a convertible note matures before a priced round?
If a convertible note reaches maturity without a qualified financing event, the investor can technically demand repayment of principal plus accrued interest. In practice, most investors agree to extend the maturity date or convert at a negotiated valuation. However, this creates leverage for investors and can put founders in difficult negotiating positions.
Do investors prefer SAFEs or convertible notes?
It depends on the investor type. Angel investors and accelerators (like Y Combinator) generally prefer SAFEs for their simplicity. Traditional investors, family offices, and some institutional investors prefer convertible notes because they provide interest returns and debt seniority. The geographic location also matters - SAFEs are more common in Silicon Valley, while convertible notes remain popular in other regions.
How do valuation caps work in SAFEs vs convertible notes?
Valuation caps function identically in both instruments - they set the maximum valuation at which the investment converts to equity, protecting early investors from excessive dilution. If a SAFE or note has a $5M cap and the Series A prices at $15M, the convertible investment converts at the $5M cap price, giving investors 3x more shares per dollar than Series A investors.
What is the difference between pre-money and post-money SAFEs?
Pre-money SAFEs (original version) calculate ownership based on pre-money capitalization, which can create uncertainty about final dilution when multiple SAFEs are outstanding. Post-money SAFEs (introduced by Y Combinator in 2018) calculate ownership based on post-money capitalization including the SAFE itself, providing clearer dilution calculations. Most new SAFEs use the post-money structure.
How much do SAFEs and convertible notes cost in legal fees?
SAFEs typically cost $0-5K in legal fees because they use standardized templates (like Y Combinator's free forms) with minimal negotiation. Convertible notes cost $5-15K due to more complex documentation and negotiable terms. For comparison, priced equity rounds cost $15-50K or more in legal fees.
Key Takeaways
Both SAFEs and convertible notes are valid fundraising instruments - the right choice depends on your specific situation, investor preferences, and strategic goals.
SAFEs have become the default for early-stage fundraising in Silicon Valley due to their simplicity, speed, and founder-friendly structure. However, convertible notes remain valuable tools for bridge financing and situations requiring debt characteristics.
The key is to understand the implications of each choice and communicate clearly with investors about your rationale.
- Choose SAFEs for speed, simplicity, and when working with angels or accelerators
- Choose convertible notes for bridge financing, traditional investors, or when debt characteristics are needed
- Interest on notes adds 5-15% more dilution depending on hold period - factor this into your planning
- Maturity dates on notes create deadline pressure - ensure your timeline is realistic
- Legal costs are 2-3x higher for notes - factor this into small raises
- Post-money SAFEs provide clearer dilution math than pre-money versions
- Investor preferences vary by geography and background - ask before assuming
- Model your scenarios with our calculator before making a final decision
Related Resources
Funding & Equity Guides
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