SAFEs vs. convertible notes

Most early-stage companies raise their first money without setting a price per share. They use a SAFE or a convertible note: an agreement that the investor's money will turn into stock later, usually at the next priced round. The two look similar, but they are different instruments with different risks.

The short version

How a SAFE works

SAFE stands for Simple Agreement for Future Equity. Y Combinator introduced it in 2013 as a simpler alternative to convertible notes, and released the post-money version in 2018. The investor pays now and receives shares when the company raises a priced round, is acquired or goes public.

Most SAFEs today are post-money SAFEs. The valuation cap is set on a post-money basis, so the investor's ownership at conversion is easy to calculate: the investment divided by the cap. A Canadian law firm's survey of 2025 financings found post-money SAFEs made up 90.7% of SAFEs.²

Key terms:

• Valuation cap. The maximum valuation at which the SAFE converts. If the priced round comes in higher, the SAFE holder converts at the cap and gets a lower price per share.
• Discount. A percentage off the price paid by new investors in the priced round, often 20%. When a SAFE has both a cap and a discount, the investor gets whichever gives the better price.
• Most-favored nation (MFN). If the company later issues SAFEs on better terms, the MFN holder can take those terms.
• Pro rata rights. Often added through a side letter, giving the investor the right to buy into the next round.

How a convertible note works

A convertible note is a loan. It accrues interest and has a maturity date. At a qualifying priced round, the principal and accrued interest convert into shares, usually with a cap and a discount like a SAFE.

If the company has not raised a priced round by the maturity date, the note is due. In practice, noteholders often agree to extend the maturity or convert at a set price, but they are not required to. That leverage is the main practical difference from a SAFE.

In the same survey, the median interest rate on notes was 7.0% in 2025 and the median term was 24 months.²

A worked example

A company raises $1 million on post-money SAFEs with a $10 million cap. Later it raises a Series A at a $30 million pre-money valuation.

• At the cap, the SAFE investors own $1 million ÷ $10 million = 10% of the company immediately before the new money comes in.
• With a 20% discount instead of a cap, they would convert at 80% of the Series A price, a much smaller stake here because the round priced well above the cap.
• The cap gives the better price, so it applies.

Now suppose the company had raised four separate SAFEs at different caps over two years. Each converts on its own terms, and together they can take a much larger share of the company than founders expect. This example is simplified and for illustration only.

Which one to use

• SAFEs are faster and cheaper to paper, carry no repayment risk and are the norm for US pre-seed.
• Convertible notes may be preferred by some investors, including angels who want the protection of debt, and are more common in some markets. A Canadian law firm survey found notes made up 48.2% of convertible securities by count in its 2025 data, and 68.3% of the dollars.²

What to check before you sign

For founders:

• Model every outstanding SAFE and note converting at the next round, at several valuations.
• Check for MFN clauses that will change older instruments when you issue new ones.
• For notes, know the maturity date and what happens at maturity.
• Keep every signed instrument and side letter in one place. Missing paperwork is one of the most common early diligence problems.

For investors:

• Ask for the full list of outstanding convertibles and their terms, not just the one you are signing.
• Confirm the company is a C corporation and check whether your SAFE may qualify for QSBS once it converts. See our QSBS guide.
• Check the entity in the state registry and confirm it is in good standing.