SAFE vs Convertible Note vs Priced Round: Which Should You Use?
The instrument you raise on shapes your ownership, your legal bill and how fast you can close. SAFEs, convertible notes and priced rounds each solve a different problem. Here is how they work, how they dilute you and how to choose between them.
Key takeaways
- A SAFE is a right to future shares, with no interest and no repayment date. It is usually the fastest and cheapest way to raise early money.
- A convertible note is a loan that normally converts into shares later. It adds interest and a maturity date.
- A priced round sells shares at a set valuation today. It costs more and takes longer, but it gives everyone clarity.
- The valuation cap matters more than almost any other term, because it sets the most an early investor will pay per share.
- Terms and suitability differ by country. Always have a startup lawyer review your documents.
At the earliest stage, putting a precise value on a company is hard. There may be little revenue, a small team and a product that is still changing. Founders and investors both want to move quickly without spending weeks negotiating a valuation that will look outdated in a year.
That is why convertible instruments exist: they let investors put money in now and receive shares later, usually when the company raises a priced round. This comparison explains the three main options, the terms that drive the outcome and how each one affects your ownership.
The three options at a glance
SAFE (simple agreement for future equity)
Y Combinator introduced the SAFE in 2013 as a simpler alternative to convertible notes. An investor pays money now in exchange for the right to receive shares at a future priced round, on terms set in the SAFE. It is not debt, so there is no interest and no date by which it must be repaid.
In 2018, Y Combinator released the post-money SAFE. Its main change is that the investor's ownership is calculated on the company's value after all the SAFE money is counted. That makes it much easier for both sides to see exactly how much of the company each SAFE investor is buying.
Convertible note
A convertible note is a short-term loan designed to turn into equity. Like a SAFE, it usually converts at the next priced round. Unlike a SAFE, it accrues interest and has a maturity date. The accrued interest typically converts into additional shares rather than being paid in cash.
Priced round
In a priced round, the company and its investors agree on a valuation and a price per share, and investors buy shares, usually preferred shares, at that price. The documents are longer and normally cover investor rights such as information rights, liquidation preferences and sometimes a board seat.
The terms that decide what investors get
Valuation cap
The cap is the maximum valuation at which a SAFE or note converts. If the company later raises at a valuation above the cap, the early investor converts as if the valuation were the cap, so they get a lower price per share than new investors. This rewards them for taking risk earlier.
Discount
A discount gives the early investor a reduced price compared with the next round. With a 20% discount and a priced round at 2.00 per share, the investor converts at 1.60 per share. When an instrument has both a cap and a discount, the investor usually gets whichever results in the lower price, not both.
Interest and maturity (notes only)
A note's interest rate increases the amount that converts, which slightly increases the investor's eventual ownership. The maturity date is when the loan comes due if it has not converted. In practice, many noteholders agree to extend maturity, but legally they may have the right to ask for repayment, which can put pressure on a company that has not raised its next round.
Most favored nation (MFN) and pro rata
An MFN clause lets an early investor adopt better terms that you later give to other investors on similar instruments. Pro rata rights let an investor buy more shares in future rounds to maintain their ownership. Both are common, and both are worth understanding before you agree to them.
How dilution works, with simple numbers
Dilution means your percentage of the company shrinks as new shares are issued. It is normal and expected. What matters is understanding how much you are giving up and when.
- Start: the founders own 100% of the company.
- Raise on a post-money SAFE: investors put in 500,000 on a 5,000,000 post-money cap. They will own 500,000 divided by 5,000,000, or 10%, when the SAFE converts. Founders are left with 90%.
- Raise a priced round: new investors buy 20% of the company. Everyone else is diluted proportionally, so founders go from 90% to 72% and SAFE holders from 10% to 8%.
This example ignores the employee option pool, which investors often ask you to create or expand before a priced round. That pool dilutes existing shareholders too, so include it when you model your own numbers.
Common mistake
Stacking several SAFEs without adding up the total. Because each post-money SAFE investor's percentage is fixed against the cap, the founders absorb the dilution from every additional SAFE. Three SAFEs that each look like "only 8%" add up to roughly a quarter of your company. Keep a running cap table after every signature.
Side-by-side comparison
| Feature | SAFE | Convertible note | Priced round |
|---|---|---|---|
| Legal form | Right to future equity | Debt that converts to equity | Equity issued now |
| Sets a valuation today | No, only a cap | No, only a cap | Yes |
| Interest | None | Yes, usually converts into shares | None |
| Maturity date | None | Yes | None |
| Legal cost and time | Lowest | Low to moderate | Highest |
| Investor rights | Minimal | Minimal, plus creditor status | Defined rights, sometimes a board seat |
| Typical stage | Pre-seed and seed | Pre-seed, seed and bridge rounds | Seed and later |
Pros and cons of each option
SAFE: pros
- Short, standard documents and low legal fees
- No interest or repayment pressure
- You can close investors one by one on a rolling basis
SAFE: cons
- Easy to over-raise and lose track of dilution
- Designed for US companies, so it may not fit your jurisdiction
- Investors get few protections, which some will not accept
Convertible note: pros
- Familiar to many angels and investors outside startup hubs
- Debt status can reassure more cautious investors
- Still faster and cheaper than a priced round
Convertible note: cons
- A maturity date can create pressure if fundraising slows
- Interest adds a little extra dilution
- As a loan, it appears as a liability on your balance sheet
Priced round: pros
- Everyone knows exactly who owns what
- Clear governance and investor rights from day one
- Often expected by institutional investors for larger rounds
Priced round: cons
- Higher legal costs and longer negotiations
- A valuation set too high can make the next round harder
- More terms to negotiate, including control provisions
How to choose for your raise
There is no universally right instrument, but a few patterns hold for many startups:
- Small, fast raise from angels and pre-seed funds: SAFEs are often the default in the US, because they are quick and familiar.
- Investors who want debt protection, or a bridge between rounds: a convertible note may be easier to agree on.
- Larger round led by an institutional investor: expect a priced round, especially if the lead wants a board seat or detailed rights.
Pro tip
Local rules can change the answer. In the UK, for example, many startups use an advance subscription agreement (ASA) instead of a SAFE, partly because of how investor tax relief schemes work. Check your local rules and ask a startup lawyer which instrument is standard where your company is incorporated.
Real-world example
Y Combinator publishes its SAFE templates and a user guide on its website, including worked examples of how conversion and dilution are calculated. Reading the official guide before talking to investors is one of the cheapest ways to understand what you are signing.
Your action plan
- Decide how much you want to raise and the maximum dilution you will accept
- Build a simple cap table that models your raise and a future priced round
- Choose an instrument based on your investors, your country and your round size
- Read the standard template for that instrument in full, including side letters
- Have a startup lawyer review terms before you send them to investors
- Update your cap table after every signed agreement
Frequently asked questions
Is a SAFE better than a convertible note?
Neither is better in every case. SAFEs are simpler and avoid interest and maturity dates, which many founders prefer. Notes give investors more protection and may be more familiar in some markets. The right choice depends on your investors and your jurisdiction.
What is the difference between a pre-money and post-money SAFE?
With the original pre-money SAFE, an investor's percentage could shrink as more SAFEs were issued. With the post-money SAFE, each investor's percentage is fixed against the post-money cap, which makes ownership easier to calculate but shifts the dilution from additional SAFEs onto the founders.
What happens to a SAFE if the company never raises a priced round?
The SAFE stays outstanding. Standard SAFEs include provisions for events such as an acquisition or a shutdown, which set out what the investor receives. Read those sections carefully, because the details differ between versions.
Do I need a lawyer to raise on a SAFE?
The templates are public, but a startup lawyer can check that the documents fit your company's structure and local law, and that side letters do not create surprises. The cost is small compared with fixing a bad term later.
Related reading
The bottom line
SAFEs win on speed and simplicity, convertible notes add investor protection at the cost of interest and a deadline, and priced rounds offer full clarity for a higher price in time and fees. Whichever you choose, model your dilution before you sign and have a startup lawyer review the terms for your country.
