Educational only — not investment, legal or tax advice.
Early rounds are often raised before anyone wants to argue about a valuation. The two tools for that are the convertible note and the SAFE. They look similar from a distance: money now, shares later, usually with a valuation cap and sometimes a discount. Up close, one difference matters most. A convertible note is debt.
Side by side
| Convertible note | SAFE | |
|---|---|---|
| Legally | A loan that converts into equity | A right to future equity, not debt |
| Interest | Yes, accrues and usually converts into extra shares | No |
| Maturity date | Yes, typically 12 to 24 months | No |
| If no priced round happens | Investor may be able to demand repayment or renegotiate | Stays outstanding; converts at a later financing or pays out on a sale |
| Paperwork | Short, but more terms to negotiate | Short, widely standardised in the US |
| Common in | Many non-US markets and some US deals | Most US pre-seed and seed rounds |
Worked example: what interest does
Example, hypothetical numbers, simple interest. You raise $500,000 on a note with 6% annual interest, a 20% discount and a valuation cap. Your priced round closes 18 months later.
- Interest accrued: $500,000 × 6% × 1.5 = $45,000
- Amount that converts: $545,000
So the noteholder converts about 9% more money than they invested, on top of whatever benefit the cap or discount gives them. The equivalent SAFE would convert exactly $500,000.
The maturity date is the real risk
If the note matures before you raise a priced round, the investor can in principle ask for their money back. Most early investors don’t want repayment; they want shares. But maturity gives them leverage to renegotiate terms at the moment you are weakest. With a SAFE, that pressure point does not exist.
Which to choose
- Raising in the US, standard pre-seed or seed: a post-money SAFE is usually simplest and most familiar to investors.
- Investors who require debt instruments (some funds, angels outside the US, or certain tax situations): a convertible note may be the expected tool.
- If you use a note: ask for a long maturity, low interest, and a clause that converts automatically at maturity rather than becoming repayable.
Whichever you choose, model the conversion: the cap, the discount and any interest all affect how much of the company you have sold. See SAFEs and dilution.
From the investor’s side of the table
Having worked on rounds in Europe and Latin America as well as with US investors, I have seen how much the default instrument varies by market. A founder raising across borders should expect each investor to suggest what is normal for them, and should pick the instrument that keeps the cap table simple for the next lead.
The short version
A SAFE is a promise of shares. A convertible note is a loan that becomes shares. If you sign a note, watch the interest and, above all, the maturity date.
Sources
Written by Fabian Cisneros. Educational only — not investment, legal or tax advice. See the full disclaimer.
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