Key Takeaways
- A SAFE is a simple agreement for future equity — no interest, no maturity date, no repayment obligation — published by Y Combinator and free to use
- A convertible note is a loan: it accrues interest, it has a maturity date, and until it converts the holder is a creditor of your company
- The post-money SAFE, which Y Combinator released in 2018, fixes the investor's percentage at signing — pre-money SAFEs did not, and that difference is where founders get surprised
- A note's maturity date is real leverage: if you cannot convert or extend by then, the holder can demand repayment
- Neither instrument sets a valuation — the cap and the discount set a ceiling and a floor on what the next priced round charges them
- Stacked SAFEs dilute all at once at the priced round, so model the whole stack before you sign the next one
- Both are sold under exemptions from registration — in the US, usually Rule 506(b) or 506(c) of Regulation D
A SAFE is an equity instrument with no interest, no maturity date and no repayment right. A convertible note is debt that accrues interest and must be repaid, extended or converted by a fixed date. For a standard US pre-seed round, use the post-money SAFE. Use a note when an investor requires a creditor claim or a hard deadline.
Both instruments do the same core job: they let you take money now and decide the price later. The difference is what happens if the priced round never arrives, and how visible your dilution is before it does.
What Is a SAFE?
A SAFE — simple agreement for future equity — gives an investor the right to shares in a future priced round, in exchange for cash today, without being a loan. Y Combinator published the original SAFE in 2013 and replaced it with the post-money SAFE in 2018. The standard forms are free, and the full explanation of the post-money mechanics is in YC's SAFE primer.
The terms you negotiate on a SAFE are short:
What a SAFE does not have: interest, a maturity date, a repayment obligation, or — critically — any mechanism that forces anything to happen if you never raise a priced round.
What Is a Convertible Note?
A convertible note is a loan that converts into equity on a trigger event, usually a qualified priced round, and carries interest and a maturity date until it does. Cooley GO maintains a plain-language definition of the instrument and the standard terms.
A note adds four things a SAFE does not have:
SAFE vs Convertible Note: The Differences That Actually Matter
Four differences decide this, and the rest is paperwork.
For the equity documents that follow a SAFE or a note — the priced round itself — the NVCA model legal documents are the US market standard, and worth reading before you sign anything that converts into them.
When a Convertible Note Is the Right Instrument
Choose a note when the investor needs a creditor claim, when a deadline is useful to you, or when you are raising outside the US.
Specific cases where a note beats a SAFE:
When a SAFE Is the Right Instrument
Choose a SAFE for a standard US pre-seed or seed round where you are collecting cheques from angels and early funds over several weeks.
The practical arguments:
Post-Money vs Pre-Money SAFE: The Change Most Founders Still Miss
On a post-money SAFE, the investor's percentage is fixed when they sign; on the older pre-money SAFE, every later SAFE diluted the earlier ones as well as the founders. This is the single most consequential change in the instrument's history and the reason the 2018 forms replaced the 2013 ones.
The practical consequence: on post-money SAFEs, the percentages are additive and you can read your total SAFE dilution before the priced round. A $200,000 cheque on a $10M post-money cap is 2% — full stop, regardless of what you sign afterwards. Every subsequent SAFE dilutes you, not the earlier SAFE holders.
Founders who raise five or six post-money SAFEs over eighteen months without totalling the percentages routinely discover at the Series A that they sold more of the company than they thought. The instrument is honest; the arithmetic is cumulative. For how the cap relates to the price you eventually negotiate, see our breakdown of pre-money valuation.
What Both Instruments Do to Your Cap Table
Neither a SAFE nor a note shows up as issued shares until it converts, which is why a cap table can look clean right up until the moment it does not.
What to track from day one:
Run those numbers before you negotiate, not after you receive a term sheet. Our walkthrough of SAFE dilution with a worked example covers the mechanics step by step.
Who Can You Legally Sell These To?
In the US, a SAFE or a note is a security, and selling one requires an exemption from registration — most commonly Rule 506(b) or Rule 506(c) of Regulation D. The operative text is at 17 CFR 230.506, and the definition of an accredited investor sits at 17 CFR 230.501. The SEC's investor education site has a plain-language accredited investor summary.
The difference that affects how you raise: under 506(b) you cannot generally solicit, so every conversation has to start from an existing relationship. Under 506(c) you can advertise the raise publicly, but you must take reasonable steps to verify that every investor is accredited — self-certification is not enough. Pick the exemption before you start outreach, because switching mid-raise is painful.
How to Decide in Ten Minutes
Work down this list and stop at the first clear answer.
For the broader sequencing of a first round — how much to raise, at what cap, and in what order — Y Combinator's guide to seed fundraising remains the clearest free reference, and Crunchbase News is useful for tracking how early-stage terms are moving in the current market.
Nothing here is legal or tax advice. Both instruments convert into real ownership, and the forms interact with your jurisdiction's tax rules in ways only your counsel can confirm.
Frequently Asked Questions
Is a SAFE debt or equity?
A SAFE is not debt. It carries no interest, no maturity date and no repayment obligation, and the holder is not a creditor of the company. It is an agreement to issue equity on a future trigger event, which is why it is usually carried in or near equity rather than as a liability. Accounting treatment varies by jurisdiction and by the specific terms, so confirm with your accountant.
What happens if a convertible note reaches maturity and you have not raised?
Three things can happen: the holders agree to extend the maturity date, the note converts on pre-agreed terms written into the document, or the holders can demand repayment. Most early-stage investors extend rather than push a startup into default, but that is a negotiation, not a right you hold. Start the conversation at least three months before maturity.
Does a valuation cap set my company's valuation?
No. A cap is a ceiling on the price at which that specific investment converts, not a price anyone has agreed to pay for the company. Your valuation is set by the priced round. Investors in the next round will know your cap, and a cap far above your eventual round price simply means your SAFE holders convert at the round price with their discount.
Can I use SAFEs and convertible notes in the same round?
Yes, and plenty of companies do, usually because one investor insisted on a note. It costs you complexity: two conversion mechanics, two sets of terms and two sets of signatures when you amend anything. If you take both, keep a single sheet tracking caps, discounts, interest and maturity in one place.
Are SAFEs enforceable outside the United States?
They are used internationally, but the tax and accounting treatment is not settled everywhere, and in several jurisdictions local counsel will steer you to a convertible loan note instead. If your company is incorporated outside the US, ask local counsel before you adopt the US form — the document is free, but using the wrong one is not.
The Bottom Line
Pick the post-money SAFE unless a specific investor or jurisdiction requires debt, and total your stack every time you sign another one. Neither instrument prices your company; both decide how much of it you have already sold. The founders who get surprised at the Series A are not the ones who chose the wrong instrument — they are the ones who never added up the caps.