What both instruments do

SAFEs (Simple Agreement for Future Equity) and convertible notes are both used to raise early-stage capital before a priced round. Instead of issuing shares at a fixed valuation today, the investor receives the right to convert their investment into equity in the future — typically at the next priced round — at a discount or cap that rewards them for investing early.

Neither instrument requires you to negotiate a valuation at the time of the investment, which is valuable when the company is too early to value precisely and both sides want to move fast.

The SAFE: what it is and how it works

A SAFE was developed by Y Combinator in 2013 as a simpler alternative to the convertible note. It's not debt — it has no maturity date and doesn't accrue interest. It's an agreement that the investor will receive shares in the next priced round, subject to the agreed terms.

The key parameters in a SAFE:

  • Valuation cap — the maximum valuation at which the investor's money converts to equity. If the next round values the company at $10M and the cap is $5M, the investor converts as if they invested at a $5M valuation.
  • Discount rate — a percentage discount to the next round's price. A 20% discount means the investor gets shares at 80% of the next round price.
  • MFN (Most Favored Nation) — the investor gets the benefit of any better terms offered to future investors on subsequent SAFEs.
  • Pro-rata rights — the right to participate in the next priced round to maintain their percentage ownership.

YC's Post-Money SAFE (introduced in 2018) changed how ownership is calculated: the cap is applied to the post-money valuation after the SAFE converts, which makes dilution modeling more predictable for both founders and investors.

The convertible note: what's different

A convertible note is debt. It has a principal amount, an interest rate (typically 4-8% annual), and a maturity date (typically 18-24 months). If a priced round doesn't happen before maturity, the note typically either converts at a negotiated price or creates a repayment obligation — which can create real pressure on the company.

Convertible notes also have a valuation cap and discount rate, working the same way as in SAFEs. The key differences are:

  • Interest accrues from day one, increasing the effective investment at conversion
  • The maturity date creates a deadline — pressure to raise a priced round
  • On a sale before conversion, notes typically need to be repaid as debt (unless the note has a conversion provision)
  • Notes appear as liabilities on the balance sheet

SAFE vs. note: which is more founder-friendly?

SAFEs are generally considered more founder-friendly for several reasons. No interest accrual means the effective investment doesn't grow over time. No maturity date eliminates the pressure of a forced conversion or repayment. The documentation is simpler — the YC SAFE is a 5-page document that every US VC counsel knows. And because SAFEs are not debt, they don't affect the company's debt/equity ratios or create repayment obligations.

That said, "founder-friendly" depends on the specific terms. A SAFE with a very low cap gives away a large equity percentage when it converts — potentially more dilutive than a note with a reasonable cap and discount. The instrument matters less than the specific economics.

When convertible notes still make sense

In some markets, particularly in LATAM, convertible notes remain more common than SAFEs — partly for regulatory reasons and partly because some investors, particularly those from non-US backgrounds, are more familiar with debt instruments. If your investors are LATAM-based or have a preference for notes, that may be reason enough to use them.

Notes can also be useful when the investor wants the protection of debt treatment — the ability to be paid back if the company is sold before the round — or when the interest accrual serves as additional compensation for a longer-than-expected timeline to a priced round.

The cap table impact of multiple SAFEs

One underappreciated complexity: running multiple SAFE rounds with different caps creates a complex dilution calculation when all of them convert at the next priced round. Founders sometimes raise three or four SAFE rounds and discover at Series A that the combined conversion creates more dilution than expected.

Modeling this before each SAFE is signed — not after — is essential. A proper cap table model shows founders exactly what percentage they'll own post-conversion at various round sizes and valuations. We build these models as part of every fundraising engagement.

Practical guidance

For most US-targeting startups at pre-seed and seed stage: use a YC Post-Money SAFE. It's standard, fast and the documentation burden is low. Negotiate the cap carefully — that's the most important economic term. Build in pro-rata rights if you can.

For LATAM-targeting or LATAM-investor-facing rounds: convertible notes may be more appropriate, depending on the investor base. For rounds with US institutional participation, SAFEs are strongly preferred.

Either way: model the cap table before you sign, understand what your dilution looks like at the next round, and make sure the documentation is properly executed and stored.