SAFE vs. Convertible Note: What First-Time Founders Actually Need to Know

You're raising your first round of funding, and your investors have asked whether you prefer a SAFE or a convertible note. You nod confidently while secretly Googling both terms under the table.

Don't worry—this is one of the most common questions first-time founders face, and the answer matters more than you might think.

The Quick Version

SAFE (Simple Agreement for Future Equity): You receive money now, and the investor receives equity later when you raise a priced round. No interest, no maturity date, no debt.

Convertible Note: You receive money now as a loan, which converts to equity later. Accrues interest and has a maturity date when it must convert or be repaid.

The Key Differences

Debt vs. Not Debt

A convertible note is technically debt. It sits on your balance sheet as a liability. If you never raise a priced round, the note holders can theoretically demand repayment (though this rarely happens in practice).

A SAFE is not debt. It's an agreement to issue equity in the future. There's no obligation to repay anything if you never raise again.

Interest

Convertible notes accrue interest, typically 4-8% annually. When the note converts, investors get equity worth their principal plus accrued interest.

SAFEs have no interest. A $100K SAFE converts to exactly $100K worth of equity, no matter how long it takes.

Maturity Date

Convertible notes have a maturity date—typically 18-24 months—when the note must convert or be repaid. This creates time pressure and can lead to uncomfortable conversations if you haven't raised by then.

SAFEs have no maturity date. They convert when you raise a priced round, however long that takes.

Why SAFEs Have Become the Standard

For most seed-stage startups, SAFEs are now the default choice. Here's why:

• Simpler: Fewer terms to negotiate means faster closing
• Cheaper: Less legal work means lower fees
• Founder-friendly: No debt on books, no maturity pressure
• Standardized: Y Combinator's SAFE documents are widely accepted

When Convertible Notes Still Make Sense

Convertible notes aren't dead. They might be the right choice if:

• Your investor insists: Some traditional investors, especially angels with banking backgrounds, prefer the structure of debt
• Tax considerations: In some jurisdictions, debt may have tax advantages
• You need the discipline: A maturity date can force focus on fundraising

What Actually Matters in Either Case

Whether you choose a SAFE or convertible note, these terms matter most:

Valuation Cap: The maximum valuation at which the investment converts. A $10M cap means the investor converts at $10M or your actual valuation, whichever is lower.

Discount: A percentage discount to your priced round valuation. A 20% discount means investors convert at 80% of what new investors pay.

Most Favored Nation (MFN): If you offer better terms to later investors, earlier investors get those terms too. Be careful with this one.

Our Recommendation

For most first-time founders raising seed money:

1. Use a post-money SAFE (the current Y Combinator standard)
2. Negotiate a reasonable valuation cap
3. Consider whether to offer a discount (often not necessary with a cap)
4. Be cautious with MFN clauses—they can cause chaos later

The best fundraising instrument is the one that lets you close quickly and get back to building. In most cases, that's a SAFE.