SAFE vs Convertible Note: Which Should a Startup Use?

A SAFE (Simple Agreement for Future Equity) is a right to receive shares in a later priced round, with no interest, no maturity date and no repayment obligation. A convertible note is debt that converts into shares at the next qualified financing, and until then it carries interest, typically 2–8%, and a maturity date, typically 12–24 months away. Both usually convert at the lower of a valuation-cap price or a discounted round price. SAFEs dominate US pre-seed and seed rounds; notes persist mainly in bridge rounds and outside the US.

The SAFE's rise is recent. Y Combinator introduced it in late 2013 as a simpler alternative to notes, then rebuilt it as a post-money instrument in September 2018. By the mid-2020s most US pre-seed and seed money arrived on post-money SAFEs. The switch changed who bears dilution, and many founders learned that only at their first priced round.

SAFE vs convertible note at a glance

How does a SAFE work?

A post-money SAFE fixes the investor's ownership at signing. Ownership equals the purchase amount divided by the post-money valuation cap, measured against the company's capitalization including all SAFEs but excluding the priced round's new money. So $1 million on a $10 million post-money cap buys 10%, before the priced round.

When a priced round arrives, the SAFE converts at the lower of the cap price and, if it has one, the discount price. Common variants are cap only, discount only, cap plus discount, and the uncapped most-favored-nation (MFN) SAFE, which takes the best terms of any later SAFE or converts at the round price. Pro rata rights, which used to sit inside the instrument, moved to a side letter in the 2018 version.

The original 2013 SAFE measured the cap on a pre-money basis. That meant SAFEs diluted each other, and nobody knew their ownership until the Series A. The post-money version made each SAFE's ownership explicit, but moved the dilution from later SAFEs onto the founders alone.

How does a convertible note work?

A convertible note is a loan that converts into equity. The research companion's example shows the mechanics. A company issues a $750,000 note at 6% simple interest, with a 20% discount and an $8 million pre-money cap on 10 million shares, so the cap price is $0.80 a share. After 18 months, $817,500 of principal and interest converts.

The note always converts at the lower of the two prices. The discount sets a floor on the investor's markup (1 ÷ 0.8 = 1.25x). The cap provides the upside.

The maturity date is what makes a note different in practice. If the company has not raised a qualified round when the note matures, the holder can demand repayment. In a slow fundraise, that gives noteholders leverage to renegotiate. A SAFE has no such clock.

Which dilutes founders more?

It depends on how many instruments you stack and how they are written. The book's worked example shows the post-money SAFE effect clearly. A company with 9 million founder shares and a 1 million-share option pool raises two post-money SAFEs: $1.0 million on a $10 million cap and $1.5 million on a $15 million cap. Each converts into 10% of the pre-round capitalization, taking the founders from 90% to 72%. A $5 million seed round at a $19 million pre-money, with the pool raised to 12% inside the pre-money, then takes the founders to about 53%.

The research companion runs a related comparison: the same two SAFEs leave founders with 48.24% after a Series A on post-money terms, versus 49.32% on equivalent pre-money terms. The gap is about one percentage point in that example, and it grows as founders stack more instruments. One summary from the research: founders who raise five SAFEs at rising caps often discover only at the priced round that they own 15–25 points less than they thought.

Notes add their own dilution through interest, which converts into shares. A note outstanding for 18 months at 6% converts 9% more principal than was invested.

The conversion overhang both share

Both instruments carry a hidden trap. If a SAFE or note converts into the same preferred stock as the new money, it gets a liquidation preference equal to the new round's price per share, not what it paid.

In the note example above, the strong case converts 1,021,875 shares. As ordinary Series A preferred at $2.00 a share, they would carry a $2.04 million preference on $0.82 million invested, about 2.5x. In the book's SAFE example, a $1 million SAFE converting at the seed price would carry about $1.75 million of preference. The fix is the same for both: convert into a shadow series (for example, Series A-1) whose preference equals the conversion price. The new lead and the founders should both ask for it whenever caps sit far below the round price. Our guide to how to read a VC term sheet explains why preferences matter so much in middle-sized exits.

When does each make sense?

Choose a post-money SAFE when:

• You are raising a pre-seed or seed round on a rolling basis from several angels or small funds.
• Speed and low legal cost matter more than precision.
• You want investors to know exactly what they bought, and you will track the cumulative dilution yourself.

Choose a convertible note when:

• You are raising an insider bridge between priced rounds. Existing investors often want interest, a maturity date and creditor status when they are funding a company toward a defined milestone.
• Your investors are angel groups or institutions whose policies prefer debt.
• You are outside the US, where SAFEs can be awkward for tax or corporate-law reasons. Local equivalents include the UK's Advance Subscription Agreement, Singapore's Convertible Equity and France's BSA AIR. 500 Global, then 500 Startups, offered its own KISS instrument in 2014, which can be written debt-like or equity-like.

Consider a priced round instead when the round is large, a lead wants a board seat, or you have already stacked enough SAFEs that nobody, including you, is sure of the cap table.

Carta's pre-seed data for 2025 reported median post-money SAFE caps of about $10 million for raises of $250,000 to $1 million and about $15 million for raises of $1 million to $2.5 million, as reported. Use those as rough context, not targets.

What investors think about each

Investors like the post-money SAFE because it makes their ownership certain and protects them from later SAFEs. They accept it at the earliest stages because, as Y Combinator's own deal shows, the instrument postpones the valuation argument until there is data to argue about. Y Combinator's standard deal since 2022 combines $125,000 for 7% on a post-money SAFE with $375,000 on an uncapped MFN SAFE.

Investors like notes in two situations: bridges, where interest and maturity give them protection while the company reaches a milestone, and weak markets, where the change-of-control premium of 1.5–2x principal protects them in an early acquisition. The book's warning applies here: insider bridges and venture debt are tools for reaching a defined milestone, not substitutes for a company the market will not fund. By the third bridge, insiders may be funding sunk cost.

The four-factor view

The Outlier Equation describes a venture return as four multiplying factors: creating a possible outlier, pricing it, governing it and turning it into cash. SAFEs and notes are pricing tools that defer the price. They do not remove it. Each cap is a price, and the sum of them, plus the option pool and the first priced round, decides how much of the outcome founders still own. A company can create real value and still deliver a weak result to its founders if the price factor quietly erodes through stacked instruments. The cure is simple: keep a live cap table and model conversion before each new check.

For the full fundraising sequence, see our guide on how to raise a seed round, and for where early instruments fit in the broader system, our guide to how venture capital works. The term sheets and financing instruments study holds every worked conversion.

The takeaway

A SAFE is simpler and has no repayment clock; a convertible note is debt with interest, a maturity date and more leverage for the holder. The post-money SAFE makes each investor's ownership clear while pushing the dilution from later SAFEs onto founders, so its simplicity is only real if someone models the cumulative effect. Notes belong mostly in bridges, and both instruments should convert into a shadow series when caps sit far below the next round's price. Chapter 7 of The Outlier Equation covers SAFEs, notes and dilution, with the worked conversions in its appendix.