Instrument
SAFE vs convertible note
Both defer the valuation to a later priced round. The differences are interest, maturity and seniority, and the way the cap is measured.
SAFEs and convertible notes solve the same problem: they let a company take money before anyone agrees on a share price, and they turn into shares at the next priced round. They differ in what happens if that round is late or never comes, and in a few mechanical details that change how many shares the investor ends up with.
Side by side
| Post-money SAFE (YC standard) | Convertible note (typical) | |
|---|---|---|
| Legal nature | Contract for future equity; not debt | Loan (debt) that converts to equity |
| Interest | None | Yes, usually simple, usually converted into shares |
| Maturity date | None; can stay outstanding indefinitely | Yes; at maturity the debt is due unless extended or converted |
| Conversion trigger | Any priced equity round, no minimum size | A "qualified financing", usually above a minimum amount |
| Cap basis | Post-money: ownership = amount ÷ cap | Usually pre-money; definition varies by document |
| Dilution between investors | SAFEs do not dilute each other before the round | Notes generally dilute each other |
| Sale before conversion | Greater of money back or as-converted value; ranks with preferred stock, behind debt | Repayment, often with a premium or conversion option; ranks as debt, ahead of all equity |
| Shutdown | Money back if anything is left after creditors, alongside preferred | Creditor claim, ahead of all equity |
| Standard form | Yes (YC's forms, used largely unmodified) | No single standard; terms are drafted per deal |
| Main founder risk | Raising too much on SAFEs before the priced round | Maturity leverage if the round is slow |
Same check, different shares
Take $1 million on a $10 million cap into our example company (10,000,000 fully diluted shares). Eighteen months later it raises $6 million at $24 million pre-money with a 10% pool. As a post-money SAFE, and as a 6% note whose cap is read as pre-money:
| Post-money SAFE | Convertible note | |
|---|---|---|
| Amount converting | $1,000,000 | $1,090,000 |
| Conversion price | $0.9000 | $0.9164 |
| Shares | 1,111,111 | 1,189,436 |
| Investor after the round | 7.40% | 7.86% |
The note investor ends up with more shares because $90,000 of interest converts too. Its conversion price is actually slightly higher ($0.9164 against $0.9000): a pre-money cap leaves out the investor's own money, which favors the company, while its share count includes the new option pool, which favors the investor. The point is that a $10 million cap on a note and on a post-money SAFE are different prices. Try your own figures in the SAFE vs note calculator.
How founders usually choose
- Default to the standard instrument where you are raising. In the U.S. that is usually the post-money SAFE for a first round; elsewhere it may be a local form (for example the Advance Subscription Agreement in the UK, which is shaped by SEIS/EIS rules: see SEIS and EIS). Investors read standard documents quickly, and lawyers' fees stay low.
- Use notes where debt is the point: bridges from existing investors, or investors who require a creditor's position. Negotiate a long maturity and a clear conversion-at-maturity clause.
- Do not mix them without a reason. Notes rank ahead of SAFEs in a sale or shutdown; YC's guide advises against issuing both.
- Whichever you use, model the conversion before you sign: a cap table with every SAFE and note converted into a plausible priced round. The cap-table calculator takes both together.
What is the same
Both are securities, sold under the same exemptions (usually Regulation D in the U.S.), with the same filing duties; both normally require board approval; both defer the valuation conversation but do not avoid it, because the cap is a valuation in all but name; and both convert into the same preferred stock as the priced round, with the same investor rights, usually through a shadow sub-series whose liquidation preference matches what the early investor paid.
Sources
- Post-Money Safe User Guide, Y Combinator. Cited for facts; not reproduced.