SAFEs and convertible notes are both common ways to raise early money without setting a price per share today. Both convert into equity later, usually at a future priced round. The difference is in what they are and what happens if that round never comes.
The SAFE
A SAFE — "simple agreement for future equity" — was introduced by Y Combinator in 2013, which publishes standard forms. The current widely used version is the "post-money" SAFE. A SAFE is not a loan: it has no interest rate and no maturity date. The investor's money converts into shares when a priced equity round happens, and a SAFE also addresses what the investor receives if the company is sold or dissolves first.
The convertible note
A convertible note is debt. It typically carries an interest rate and a maturity date. It's designed to convert into equity at a future financing, with accrued interest usually converting too. If the note reaches maturity before converting, the company and noteholders may need to negotiate an extension, a conversion, or repayment — so the maturity date matters.
Terms you'll see in both
- Valuation cap. The maximum valuation at which the investment converts, which rewards early investors if the company's value grows.
- Discount. A percentage off the price that new investors pay in the priced round.
- Most-favored-nation (MFN). A right to receive better terms if later investors in the same instrument get them.
- Pro rata rights. A right to invest more in a future round, often set out in a side letter.
Side by side
| SAFE | Convertible note | |
|---|---|---|
| Legal form | Contract for future equity | Debt |
| Interest | None | Usually accrues |
| Maturity date | None | Yes |
| Converts at | Priced equity round | Qualified financing, per its terms |
| Common terms | Cap, discount, MFN | Cap, discount, interest, maturity |
Dilution is real
Both instruments convert into shares that dilute founders. With several SAFEs or notes outstanding at different caps, the combined effect can be larger than founders expect. Model it on your cap table before you sign.
It's still a securities offering
SAFEs and notes are securities. Each sale needs a registration exemption under federal and state law. For example, offerings under Regulation D Rule 506 require a Form D notice with the SEC within 15 days after the first sale, and California has its own exemptions and notice requirements. Getting this wrong can create problems in later diligence.