fundraising
The Founder's Guide to SAFE Notes and Convertible Instruments
SAFEs, convertible notes, and priced rounds. What they mean, how they work, and which one you should use for your raise.
You’re raising money. Someone tells you to use a SAFE. Another person swears by convertible notes. Your lawyer mentions a priced round. It’s a lot.
Here’s the breakdown.
**What a SAFE is**
A SAFE (Simple Agreement for Future Equity) is a contract between you and an investor. You get cash now. The investor gets the right to shares later, usually when you raise a priced round or sell the company. No interest. No maturity date. No repayment.
Y Combinator introduced the SAFE in 2013. It caught on because it’s short and cheap to draft. You can close a SAFE in days, not weeks. The paperwork is a few pages. Your legal bill stays small.
The trade-off: the investor’s terms are set by whatever happens in the next round. If that round has a valuation cap, the SAFE converts at the lower of the cap or the discount. You don’t know your exact dilution until later.
**What a convertible note is**
A convertible note is a loan that turns into equity. It has an interest rate, usually 5% to 8%, and a maturity date, often 18 to 24 months out. If you don’t raise a priced round by then, the note comes due. You either pay it back or convert it on terms you negotiate at that moment.
Notes have been around longer than SAFEs. They’re more familiar to older investors and some international funds. The interest accrues and adds to the principal, so the investor gets a little extra equity for waiting.
The downside: the maturity date is a ticking clock. If your next round stalls, you’re dealing with debt that’s due. You might have to extend it, which means renegotiating with every note holder. That’s friction you don’t need mid-raise.
**What a priced round is**
A priced round is a traditional equity financing. You set a valuation, sell shares (usually preferred stock), and sign a long purchase agreement. It’s the most formal structure. It’s also the most expensive to execute. Legal fees run $20,000 to $50,000 or more, and the process takes six to ten weeks.
You get a clean cap table and clear terms. Board seats, voting rights, and liquidation preferences are all spelled out. Investors get actual shares, not a promise of future shares.
Priced rounds make sense when you’re raising a large amount, say $2 million or more, or when you need institutional investors who require preferred stock. For a smaller seed round, the cost and time often aren’t worth it.
**Which one should you use?**
If you’re raising under $1 million and expect a priced round within 12 to 18 months, a SAFE is the simplest path. No interest, no maturity date, no negotiation over repayment. Just cash in, shares later.
If you’re raising from investors who are used to notes, or you’re in a jurisdiction where SAFEs are uncommon, a convertible note works. Just keep an eye on the maturity date and the interest. It’s a loan, so treat it like one.
If you’re raising $2 million or more, or you need a lead investor who wants a board seat and preferred stock, go straight to a priced round. The upfront cost is real, but you avoid the conversion headache later. You also set your valuation once, and that’s that.
A few practical notes. SAFEs and notes both push the valuation question to the next round. That can be fine if your next round comes quickly. If it doesn’t, you’re stuck with terms that might not reflect where your company actually is. Also, multiple SAFEs with different caps and discounts create a messy cap table. Keep the number of instruments low.
One more thing. The post-money SAFE, which is the standard now, calculates dilution based on the valuation after the new money comes in. That’s clearer for founders than the old pre-money version. Use the post-money form.
Your choice comes down to timing, cost, and who’s writing the check. For most early-stage founders, a SAFE is the right default. If your investors push back, a note is a fine fallback. If you’re raising serious money, skip both and price the round.
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