Early-Stage Financing: SAFE vs. Convertible Notes

When you’re raising your first institutional capital, one of your earliest decisions is deceptively simple: SAFE (Simple Agreement for Future Equity) or a convertible note? Both let you raise money quickly, but they work very differently once the ink is dry.

If you would like support with venture financing, please contact Aurora Shao, Esq. at aurora.shao@consultils.com. We work with startups and investors to create clear, consistent terms that support your fundraising goals.

What Are SAFEs and Convertible Notes?

A SAFE is a contract that gives investors the right to receive equity in a future priced round, typically with a valuation cap and/or discount. SAFEs were introduced by Y Combinator to simplify early-stage fundraising. The goal was straightforward: create a standardized document that minimizes negotiation and allows companies to close quickly.

A convertible note is a debt instrument that converts into equity at a future financing round, usually with a valuation cap and/or discount similar to a SAFE. Unlike SAFEs, convertible notes include traditional debt features: a maturity date, an interest rate, and in some cases, repayment obligations if conversion never occurs. Convertible notes can be more document-heavy. Different investors may have preferred forms, and may require separate security agreements.

Debt vs. Equity

Convertible notes are debt. This means they create a legal obligation to repay the principal amount, plus accrued interest, if the note doesn’t convert into equity. They have maturity dates at which point the company must either repay the investor, extend the note, or convert it into equity even without a qualified financing. This debt obligation can create pressure on founders, particularly if the company hasn’t raised a priced round by maturity and lacks cash to repay investors.

SAFEs are not debt. They do not accrue interest, have no maturity date, and create no repayment obligation. The investor receives equity only when a triggering event occurs—typically a future equity financing. If no triggering event occurs, the SAFE remains outstanding indefinitely.

Conversion Mechanics

Convertible notes convert based on whichever valuation is lower:

• The valuation cap, or

• The next round’s valuation with a discount applied, if applicable. The principal amount plus accrued interest converts into equity, so investors receive shares for both their initial investment and the interest that accumulated over time.

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SAFEs come in several varieties, such as cap only, discount only, cap and discount, and no cap/discount. The investment amount converts at the better of the valuation cap or the discounted price in the next round if both are applicable. Post-money SAFEs, which have become increasingly standard, provide greater clarity by defining the investor’s ownership percentage on a fully diluted basis.

Investor Protections and Founder Flexibility

Convertible notes typically include stronger investor protections: accruing interest, a maturity date that forces action, and sometimes the ability to secure the investment against company assets.

SAFEs usually include only basic company representations and conversion triggers. The lack of a maturity date gives founders more breathing room but can leave investors without recourse if the company stalls or pivots without raising a qualified round. Some investors address this by negotiating for Most Favored Nation (MFN) provisions in a side letter, ensuring they receive terms at least as favorable as any subsequent SAFE investors. Some will also request pro rata rights to participate in the equity financing when their SAFE converts.

Accounting and Tax Implications

Convertible notes appear as liabilities on the balance sheet until conversion, and companies must account for accrued interest as an expense. Depending on the terms, notes may also require complex fair value accounting or derivative liability treatment.

SAFEs generally do not appear on the balance sheet as liabilities until a conversion triggering event becomes probable. This can make a company’s financial statements cleaner and simpler, particularly for early-stage companies still building their finance functions. However, SAFEs do create future equity dilution that must be disclosed and tracked, especially when raising subsequent rounds or providing equity incentive grants to employees.

Market Perception

SAFEs have become the dominant instrument in Silicon Valley and other major startup ecosystems, particularly for accelerator and angel rounds. Their simplicity and founder-friendly terms align well with the fast-moving nature of early-stage investing.

However, not all investors embrace SAFEs equally. Some institutional seed funds and angels prefer convertible notes because they offer clearer maturity timelines and the structural protections of debt. International investors, in particular, may be less familiar with SAFEs or may face challenges accounting for them under their home country rules.

There is no universally "better" option. In practice, many companies end up using both across different financing tranches, accommodating investor preferences while keeping documentation as streamlined as possible.

If you would like support with venture financing, please contact Aurora Shao, Esq. at aurora.shao@consultils.com. We work with startups and investors to create clear, consistent terms that support your fundraising goals.

Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.

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As Partner and Head of M&A at ILS, David advises technology companies on venture financings, M&A, and cross-border transactions—bringing top-tier legal expertise and deep technical insight. He has closed $3B+ across 100+ deals, supporting clients from early-stage startups to global enterprises across the full corporate lifecycle, with a dealmaking style that combines strategic judgment and crisp execution.

Previously, David was Head of Legal at Humane, Inc., an AI unicorn acquired by HP, and practiced at Wilson Sonsini, Latham & Watkins, Cooley, and Gibson Dunn. He is known as both legal counsel and strategic business partner on complex, high-stakes transactions across AI, clean energy, biotech, and software.

Email: david.liu@consultils.com | Phone: 626-344-8949

As Partner and Head of Transactions at ILS, Fiona delivers professional legal and strategic support to tech companies—with a focus on AI, medical devices, and fintech. Beyond full-spectrum technology law, she specializes in export control and compliance: supporting tech firms at all growth stages, aiding startups in scaling operations, and helping mature enterprises address regulatory challenges.

Previously, Fiona gained hands-on experience building legal frameworks from scratch. She advised unicorn companies on global expansion and regulatory hurdles, developing deep insight into clients’ growth challenges. Combining legal expertise with commercial judgment, she helps clients establish sustainable legal processes and provides clear guidance to advance their business.

Email: fiona.xu@consultils.com | Phone: 626-344-8949

Aurora specializes in corporate law, venture financing, and compliance, with extensive experience advising emerging growth companies throughout their lifecycle—from formation and corporate governance to employment compliance and fundraising.

With extensive cross-border experience in both China and the U.S., Aurora provides strategic counsel to clients navigating international transactions, corporate structuring, and market expansion. She brings valuable experience advising startups and managing complex corporate matters. Her background in the biotech sector and at leading Beijing law firms—where she focused on corporate compliance and cross-border transactions—equips her with strong insight into the regulatory and business environments of both jurisdictions.

Email: aurora.shao@consultils.com | Phone: 626-344-8949