SAFEs vs. Convertible Notes: which one is right for your startup?

When raising early-stage capital, founders often choose between SAFE (Simple Agreement for Future Equity) notes and convertible notes. Both options allow startups to raise funds without setting an immediate valuation, but they have key differences. Understanding these differences can help you make an informed decision.

What is a SAFE?

A SAFE is an agreement where an investor provides capital today in exchange for the right to receive equity in the future, typically at the next priced funding round. Created by Y Combinator, SAFEs are designed to be founder-friendly and simplify early-stage fundraising.

Key features of SAFEs:

• No interest or maturity date.
• Converts into equity when a future funding round occurs.
• May include a valuation cap or discount rate (or both) to reward early investors.
• No debt obligations, making it a simpler instrument.

📌 Further Reading: Y Combinator’s SAFE Primer

What is a Convertible Note?

A convertible note is a debt instrument that converts into equity at a future financing round. Unlike SAFEs, convertible notes accrue interest and have a maturity date, making them a hybrid between debt and equity.

Key features of Convertible Notes:

• Includes an interest rate (typically 4-8%).
• Has a maturity date, at which point it may need to be repaid or converted.
• Usually contains a valuation cap or discount to incentivize early investors.
• Can give investors more leverage in negotiations due to repayment terms.

📌 Further Reading: VC Stack’s Deep Dive: Convertible Notes

Key differences between SAFEs and Convertible Notes

Which one should you choose?

• Choose a SAFE if: You want a simpler agreement with no debt risk and no pressure from maturity deadlines.
• Choose a Convertible Note if: Your investors prefer debt-based instruments or want additional security with interest and a repayment option.

📌 Further Reading: Carta’s Guide to SAFEs vs. Convertible Notes and Priced vs. Unpriced Rounds

Additional Considerations for Founders

Negotiation strategies

Regardless of whether you choose a SAFE or a convertible note, it’s crucial to negotiate favorable terms. Consider:

• Valuation Cap: A lower cap benefits investors, while a higher cap gives founders more equity retention.
• Discount Rate: Investors typically receive a 10-20% discount on the next funding round’s valuation.
• Pro-Rata Rights: Some agreements allow early investors to invest more in future rounds to maintain their ownership percentage.

Impact on future fundraising

• SAFEs and convertible notes defer valuation discussions, but that means your priced round investors will consider prior agreements when setting the valuation.
• Accrued interest on convertible notes can increase dilution for founders at the time of conversion.
• Having too many SAFEs or notes outstanding can create a complex cap table, making future fundraising more challenging.

Investor Preferences

The vast majority of early-stage rounds now use SAFEs, as they offer simplicity and speed. However, some investors, particularly those outside major capital hubs, may prefer convertible notes due to their structure and risk mitigation features.

Institutional investors and VCs typically transition to priced rounds from larger seed rounds onward, moving away from these early-stage instruments. For more on the rise of SAFEs, check out Carta’s insights.‍‍

Final Thoughts

SAFEs and convertible notes both help startups secure early funding without setting an immediate valuation. The right choice depends on your investors’ preferences and how much flexibility you need as a founder.

Need help raising your next fundraising round? Capwave AI provides expert tools and insights to navigate early-stage funding with confidence.