SAFE vs Convertible Note: What's the Difference and Which One Should You Use?

 

When early-stage startups raise money, they often skip complicated equity rounds in favor of simpler instruments: SAFEs or Convertible Notes. These tools help startups bring in capital quickly while delaying valuation discussions.

But while both convert into equity at a later stage, they work differently. So how do you choose between a SAFE (Simple Agreement for Future Equity) and a Convertible Note?

Let’s break it down clearly and simply.

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🔍 What Is a Convertible Note?

A Convertible Note is a short-term loan that converts into equity when the company raises its next priced funding round.

Key Features:

• Treated as debt

• Has an interest rate

• Has a maturity date (when it must be repaid or converted)

• Includes a valuation cap and/or discount rate

💡 Example: An investor puts in $100,000 at a 20% discount with a $2M cap. When the startup raises its Series A, the note converts into shares at that cap or discount — whichever gives the investor more equity.

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🔍 What Is a SAFE?

A SAFE (Simple Agreement for Future Equity) is not debt. It’s an agreement to receive equity in the future, usually during a priced round.

Created by Y Combinator in 2013, SAFEs are simpler, faster, and more founder-friendly than notes.

Key Features:

• Not a loan — no interest or repayment

• No maturity date

• Converts to equity at a future funding event

• Can include a valuation cap, discount, or both

💡 Example: An investor gives $100,000 through a SAFE with a $3M cap. When the company raises a priced round, the SAFE converts into equity at that capped valuation.

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🆚 SAFE vs Convertible Note: Feature-by-Feature Comparison

Feature	SAFE	Convertible Note
Legal Structure	Equity contract	Debt instrument
Interest Rate	❌ None	✅ Yes (typically 4–8%)
Maturity Date	❌ None	✅ Yes (usually 12–24 months)
Complexity	✅ Simple	⚠️ More complex (loan terms involved)
Investor Protections	Less traditional protections	More protections due to debt nature
Risk to Startup	✅ Lower (no repayment)	⚠️ Higher (risk of repayment)
Conversion Event	Next equity round	Next equity round or maturity date
Founder Friendly?	✅ Yes	⚠️ Depends on terms
Investor Friendly?	⚠️ Depends on familiarity	✅ More traditional

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🔧 Shared Features

• Valuation Cap: Sets the maximum price for conversion into equity.

• Discount Rate: Offers investors a lower price per share than future investors.

• Conversion Trigger: Both convert during a future priced funding round.

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✅ Pros and Cons

SAFE – Pros:

• Simple and quick to execute

• No debt or repayment risk

• Popular with early-stage investors (esp. angels, accelerators)

SAFE – Cons:

• No pressure to convert (no maturity)

• Investors may feel under-protected

• Less familiar to traditional investors

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Convertible Note – Pros:

• Familiar to institutional investors

• Offers timeline (via maturity date)

• Protects investors with interest and debt status

Convertible Note – Cons:

• More complex legal structure

• Repayment pressure if no follow-on funding

• Interest may dilute founders more over time

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🧠 When to Use Which?

Use a SAFE if:

• You’re raising from angels or accelerators

• You want a fast, founder-friendly structure

• You’re confident you’ll raise a priced round soon

Use a Convertible Note if:

• Investors are more traditional or risk-averse

• You want a defined timeline for conversion

• You're okay with interest and added complexity

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🏁 Final Thoughts

Both SAFEs and Convertible Notes offer efficient ways to raise early-stage capital. The best choice depends on your investors’ preferences, how fast you plan to raise a priced round, and how much legal complexity you can handle.

TL;DR:

• SAFE = Simpler, equity-based, founder-friendly

• Convertible Note = Debt-based, investor-protective, includes deadlines

In either case, make sure you work with an experienced startup lawyer to draft documents and avoid pitfalls.