SAFE vs. Convertible Note: Choosing the Right First Investment Tool for Your Startup
- The Startup Ladies
- Oct 18
- 7 min read
When you’re raising money for the very first time, often from family, friends, or acquaintances who believe in you, you’ll need to decide how to accept that investment. Two common tools early-stage founders use are called a SAFE and a Convertible Note.
If you’re a first-time founder or investor, these terms can sound intimidating. Don’t worry, by the end of this article, you’ll understand exactly what each means, when to use them, and how to choose the one that best fits your situation.
What Does It Mean to “Structure” an Investment?
Before diving in, let’s define a few basics.
When we talk about structuring an investment, we mean deciding the legal and financial framework that defines how money is exchanged between a startup and an investor. That structure determines things like:
What the investor gets in return for their money (ownership, debt, or future rights).
When and how that exchange happens.
What happens if the company grows, raises more money, or doesn’t succeed.
Now, let’s look at the two most common structures used by early-stage founders: the SAFE and the Convertible Note.
What Is a SAFE?
A SAFE, or Simple Agreement for Future Equity, was created by Y Combinator (2013) to make early investing simpler and faster. In plain English, a SAFE is a written promise that says:
“You, the investor, give me money now to help grow the business. In return, you’ll get equity (ownership shares) later -when we raise a formal funding round.”
Let’s break that down.
Equity means ownership in the company. When the company grows, that ownership can become valuable.
A SAFE is not debt; there’s no interest, no repayment, and no due date. This makes it easier for founders who don’t want the pressure of paying anything back if things take longer than planned.
Instead of repayment, the SAFE investor gets to convert their investment into shares during a later “trigger event,” like when a professional investor leads a formal round of funding (called a priced round, meaning the company’s value is set at a specific dollar amount and shares are sold at a specific price).
When that happens, the SAFE investor gets their shares at a discount (usually 10–25% cheaper than new investors pay) or based on a valuation cap which is the maximum company valuation their investment will convert at, even if your next round’s valuation is higher.
These two terms: discount and valuation cap reward early supporters for taking more risk.
Discount: If new investors buy shares at $1.00, and the SAFE investor has a 20% discount, they get their shares at $0.80.
Valuation Cap: If your next round values your company at $10 million, but your SAFE has a $5 million cap, the SAFE investor’s shares convert as if the company were valued at $5 million.
Many SAFE agreements also mention a liquidity event or change of control. Tthat simply means what happens if the company is sold or merged before the SAFE converts. The investor might get their money back, or convert into shares at that time.
What Is a Convertible Note?
A Convertible Note is a bit older and more traditional than a SAFE. It’s basically a loan that turns into equity later (Fidelity Private Shares, 2024). In this structure, the investor loans money to the startup now, but instead of expecting repayment in cash, they agree that the loan will convert into ownership (shares) in the future, usually during a priced round.
Since it’s legally debt, a Convertible Note includes:
An interest rate (commonly 2–8%)—the interest builds up over time but isn’t usually paid out in cash; it’s added to the total amount that will convert into shares.
A maturity date—a deadline (often 12–24 months) for either conversion or repayment. If no priced round happens before that date, the company and investor have to decide whether to extend the deadline, convert at a preset price, or repay the money.
Like SAFEs, Convertible Notes also often include a discount and/or valuation cap to reward early risk-takers.
A Convertible Note gives investors a little more protection because it’s technically a debt instrument. That means in a worst-case scenario (like a bankruptcy), they’re legally ahead of shareholders when it comes to getting repaid. Here’s a simpler version of that concept:
Because Convertible Notes are loans, they’re treated like debts if the company closes. That means Convertible Note investors are paid back before people who only own equity (like SAFE investors or founders).
Comparing SAFEs and Convertible Notes
Pros and Cons for Founders and Investors
---> For Founders
SAFE – Pros:
Simple and inexpensive to set up.
No interest or repayment deadlines.
Fast to raise money from multiple people.
Keeps the company debt-free until conversion.
SAFE – Cons:
Some investors may worry about lack of protection.
If you issue too many SAFEs, you may not realize how much ownership you’ve promised (This is called cumulative dilution. Each new SAFE slightly reduces your own ownership percentage).
SAFEs only convert when you raise a priced round; if you never do, they may linger unresolved.
Convertible Note – Pros:
Often preferred by more experienced investors.
Interest and maturity give investors confidence.
Familiar format to lawyers and accountants.
Convertible Note – Cons:
More complex legal paperwork and negotiation.
The maturity date adds pressure as you must raise another round or repay.
Accrued interest increases the total that converts into shares.
---> For Investors
SAFE – Pros:
Simple and quick to sign.
Provides potential upside if the company grows (thanks to discount or cap).
No need to track interest or maturity deadlines.
SAFE – Cons:
No repayment rights or downside protection if the company fails.
The investment can remain “in limbo” for years if no priced round happens.
Convertible Note – Pros:
More security—investors can ask for repayment if things go south.
Earns interest (modest but measurable).
Often used for larger checks or when investors want clearer terms.
Convertible Note – Cons:
Requires more legal work.
May force uncomfortable repayment talks if the startup isn’t ready for a next round.
When to Use Each One
If you’re raising your first round from friends, family, and supportive acquaintances, your focus should be on keeping things:
Simple.
Fair.
Legally clean.
Use a SAFE when:
You’re raising small amounts quickly.
Your investors trust you personally and don’t need debt-style protection.
You expect to raise your next (priced) round soon.
You want to avoid repayment obligations or maturity deadlines.
Use a Convertible Note when:
You have a few larger investors who want more structure.
Your next big raise might take longer to close.
Your investors are used to traditional debt-style investing.
You want to demonstrate clear conversion timing and protection for both sides.
Real-World Example of Each
SAFE Example
You raise $50,000 using a SAFE with:
20% discount
$4 million valuation cap
A year later, you raise a Series A round valuing your company at $8 million. The SAFE converts using the better deal for your investor:
Their $50,000 converts as if your company were worth $4 million (the cap), giving them twice as much ownership as new investors buying in at $8 million.
No interest, no repayment—just conversion into shares once the priced round happens.
Convertible Note Example
You raise $100,000 on a Convertible Note with:
6% annual interest
$8 million valuation cap
18-month maturity date
After one year, your company raises a priced round at a $10 million valuation.The investor’s $100,000 + $6,000 interest = $106,000 converts into shares based on the $8 million cap, giving them a better price per share.
If that round didn’t happen before 18 months, you’d need to either repay, extend the note, or convert at a pre-agreed fallback price.
What Founders Need in Place Before Using Either
Before you accept anyone’s money, have these six things ready:
Legal Entity & Structure – You must have an incorporated company (most often a C-Corp).
Cap Table (Capitalization Table) – A list showing who owns what percentage of your company.
Standard Templates & Legal Support – Use trusted templates (like The Startup Ladies' template based on Y Combinator’s SAFE) and have an attorney review them.
Clear Conversion Terms – Know your valuation cap, discount, and what events trigger conversion.
Board or Founder Authorization – You must officially approve any investment documents.
Investor Diligence & Disclosure – Before signing, provide investors with:
Your business plan and current goals.
A realistic timeline for your next raise.
How their money will be used.
Risks (that they could lose the full investment).
Copies of any other SAFE or note already issued.Setting these expectations builds trust and prevents confusion later.
The Takeaway
Both SAFEs and Convertible Notes are excellent tools for first-time founders raising money from early believers.
A SAFE is faster and simpler and ideal for friendly, early rounds. A Convertible Note offers more investor protection and is better for larger checks or longer timelines.
If you’re unsure, talk with your attorney or an experienced founder in your network who has used both. The key is to choose the structure that fits your company’s growth timeline, investor relationships, and comfort with legal complexity. If you don't have a trusted attorney, The Startup Ladies are connected to several. Simply send us an email to Info@TheStartupLadies.org and we'll be happy to connect you!
Raising your first round is a HUGE milestone. Understanding these tools ensures that both you and your investors start off on the same page, building trust and setting the stage for future success.
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