SAFEs and convertible notes solve the same problem. They let a startup raise money now and set the share price later, at the next priced round.
They differ in one fundamental way, and that difference drives everything else.
A convertible note is debt; a SAFE is not
A convertible note is a loan. It accrues interest and has a maturity date by which it should convert or be repaid.
A SAFE (Simple Agreement for Future Equity) is a contract for future shares. It has no interest rate and no maturity date. Y Combinator introduced it in 2013.
Both convert at a cap or a discount
Both instruments usually convert at the next priced round, at the better price for the investor of:
- The valuation cap price: the cap divided by the company's capitalization as the documents define it.
- The discount price: the round price minus a discount, often in the 10% to 25% range.
| SAFE | Convertible note | |
|---|---|---|
| Legal form | Contract for future equity | Debt |
| Interest | None | Accrues, often a few percent a year |
| Maturity date | None | Yes, often 12 to 24 months |
| Converts at | Cap and/or discount | Cap and/or discount, plus accrued interest |
| Repayment risk | None | Possible at maturity |
| Standard documents | YC post-money SAFE | No single standard |
| Typical cost to issue | Low | Higher, more negotiation |
Worked example: the same $500,000 as a SAFE and as a note
A company raises its Series A at $2.00 per share. For simplicity, its capitalization for the cap calculation is 8,000,000 shares.
The SAFE
- Investment: $500,000.
- Valuation cap: $8,000,000, giving a cap price of $8,000,000 ÷ 8,000,000 = $1.00.
- Discount: 20%, giving a discount price of $2.00 × 0.80 = $1.60.
- The SAFE converts at the lower price, $1.00.
- Shares: $500,000 ÷ $1.00 = 500,000.
The convertible note
Same terms, plus 6% simple interest, outstanding for 18 months.
- Accrued interest: $500,000 × 6% × 1.5 = $45,000.
- Converting amount: $545,000.
- Shares at $1.00: 545,000.
The post-money SAFE makes dilution easy to see
YC's post-money SAFE, published in 2018, measures the cap after all SAFE money is counted. Each investor's ownership before the priced round is simply:
Ownership = investment ÷ post-money valuation cap
| SAFE | Investment | Post-money cap | Ownership |
|---|---|---|---|
| Angel | $250,000 | $10,000,000 | 2.5% |
| Fund | $750,000 | $10,000,000 | 7.5% |
| Total | $1,000,000 | 10.0% |
That clarity has a cost. Every additional post-money SAFE dilutes the founders, not the earlier SAFE holders.
The original pre-money SAFE measured the cap before SAFE money, so SAFE holders diluted each other. It is harder to model and less common today.
Choose based on who is investing and what they need
Use a SAFE when
- You are raising pre-seed or seed from angels and seed funds used to YC documents.
- You want low legal cost and fast closing.
- You do not want a repayment date.
Use a convertible note when
- Investors require debt protections, such as priority over equity in a wind-down.
- Local practice or investor policy favours notes.
- You are raising a bridge from existing investors who prefer notes.
Track every SAFE on the cap table, not in a folder
Unconverted SAFEs and notes are easy to forget until the priced round, when they suddenly become shares. Record each one with its amount, cap, discount, date and, for notes, interest and maturity.
Before a round, model the conversion of all of them at once. Stacked SAFEs with different caps often dilute founders more than expected.
Capable converts SAFEs and notes to the share
Capable records pre-money and post-money SAFEs, caps, discounts, MFN and pro rata rights, and notes with interest and maturity. The round modeler converts them together and shows dilution for each holder.
When the round closes, conversion creates the preferred shares and closes the SAFEs, so the cap table and the documents agree.
Next: how to size your option pool and what a 409A valuation is.
This guide is general information, not legal or investment advice.