Convertible Notes vs SAFEs: Which Is Right for Your Startup?

When you raise your first round of funding, you will almost certainly encounter two instruments: convertible notes and SAFEs (Simple Agreements for Future Equity). Both let you raise money without setting a formal valuation, but they work differently under the hood. The wrong choice can cost you money, create cap table confusion, or misalign incentives with your investors. This guide compares them in detail so you can make an informed decision.

What is a convertible note?

A convertible note is a short-term loan that converts into equity when a qualifying event occurs (usually a priced funding round). Until conversion, it behaves like debt: it accrues interest and has a maturity date. If the maturity date arrives without a qualifying event, the founder must either repay the loan, negotiate an extension, or convert at pre-agreed terms.

• Interest rate: typically 4–8% per year, accrued (not paid). The accrued interest converts to equity alongside the principal.
• Maturity date: usually 18–24 months. The note must convert or be repaid by this date.
• Valuation cap: sets a maximum valuation at which the note converts, protecting the investor from excessive dilution.
• Discount: gives the note holder a discount (usually 15–25%) on the share price in the qualifying round.
• Conversion trigger: typically a "qualified financing" above a minimum threshold (e.g., $1M raised in a priced round).

What is a SAFE?

A SAFE (Simple Agreement for Future Equity), created by Y Combinator in 2013, is not debt. It is a contractual right to receive equity in a future priced round. There is no interest, no maturity date, and no repayment obligation. When a qualifying event occurs, the SAFE converts into preferred shares.

The most common version today is the post-money SAFE (introduced by YC in 2018), which defines the investor's ownership as a percentage of the post-money valuation cap, making the conversion math clearer.

• Valuation cap: works the same as a note — sets maximum conversion price.
• Discount: some SAFEs include a discount, but many cap-only SAFEs do not.
• No maturity date: the SAFE stays outstanding until conversion, dissolution, or a change of control event.
• No interest: the investor receives equity for their investment amount only, no accrued interest.

Side-by-side comparison

Conversion math: how each instrument converts

Convertible note conversion example

Suppose a note has a $5M cap, 20% discount, 5% interest, and was issued 12 months ago for $100K. The Series A prices shares at $2.00 (implying a $10M pre-money on 5M shares):

• Accrued interest: $100K × 5% × 1 year = $5,000
• Total converting: $105,000
• Cap price: $5M ÷ 5M shares = $1.00
• Discount price: $2.00 × (1 − 20%) = $1.60
• Conversion price: lower of $1.00 or $1.60 = $1.00
• Shares received: $105,000 ÷ $1.00 = 105,000 shares

Post-money SAFE conversion example

A post-money SAFE with a $5M cap and $500K invested. No discount, no interest:

• Investor ownership: $500K ÷ $5M = 10.0%
• This percentage is guaranteed regardless of the Series A price
• If the Series A is at $2.00/share on 5M shares, the SAFE converts to 555,556 shares (10% of 5,555,556 post-conversion shares)

The "SAFE stack" problem

A common issue arises when founders raise multiple post-money SAFEs at different caps. Each SAFE locks in a guaranteed percentage of the post-money cap, but when they all convert in a priced round, the combined dilution can be much higher than expected. Example:

• SAFE 1: $200K at $4M cap → 5.0% ownership
• SAFE 2: $300K at $6M cap → 5.0% ownership
• SAFE 3: $500K at $8M cap → 6.25% ownership
• Total SAFE dilution: 16.25% — before the Series A investors even come in

Add a 20% Series A investment and a 15% option pool, and the founders could be below 50% ownership after just two stages of fundraising. Track every SAFE carefully on your cap table.

UK perspective: Advanced Subscription Agreements (ASAs)

In the UK, the equivalent of a SAFE is typically an Advanced Subscription Agreement (ASA). ASAs are structured to qualify for SEIS/EIS tax relief, which is critical for UK angel investors. Key differences from a SAFE:

• ASAs must be structured as an advance subscription for shares (not a right to future equity) to preserve SEIS/EIS eligibility.
• There is typically a "longstop date" (similar to maturity) by which shares must be issued.
• The conversion mechanics are similar (valuation cap, discount).
• Convertible Loan Notes (CLNs) are also common in the UK but, like US notes, carry interest and maturity conditions.

When to use each instrument

How eSignHub fits into the process

Whether you choose a SAFE or a convertible note, the execution is the same: draft the agreement, send it for signature, track status, and update your cap table. eSignHub handles all of this — send SAFEs or CLNs to multiple investors for e-signature, track which investors have signed, and automatically record the instruments on your cap table for accurate dilution modeling.