Convertible Note vs SAFE: How the Two Startup Deals Differ
Both turn early startup checks into shares at the next priced round. One is a loan with a clock attached, the other is not. A side-by-side table and a conversion worked through.
A convertible note is a loan that converts into shares, so it carries interest and a maturity date. A SAFE is a contract for future shares with no interest and no maturity date. Both usually convert in the next priced round using a valuation cap or discount, and the exact terms are in the signed note or SAFE.
Y Combinator introduced the SAFE in 2013 as a simpler alternative to the convertible note, and it publishes its standard forms for free. Convertible notes have no single standard form, so their terms vary more from deal to deal.
What is the main difference between a convertible note and a SAFE?
The main difference is that a convertible note is debt and a SAFE is not. That one fact drives the others: a note accrues interest and has a due date, and its holder is a creditor until conversion. A SAFE holder has no repayment date and ranks behind creditors if the company dissolves.
| Feature | Convertible note | SAFE (Y Combinator post-money) |
|---|---|---|
| Legal form | Debt | Contract for future equity, not debt |
| Interest | Accrues, and usually converts into shares with the principal | None |
| Maturity date | Yes; terms say what happens if there is no conversion by then | None |
| Valuation cap | Common | Offered as a separate form |
| Discount | Common, often alongside a cap | Offered as a separate form; standard forms use a cap or a discount, not both |
| What triggers conversion | A “qualified financing,” often with a minimum amount raised | A priced equity financing |
| Sale of the company first | Set by the note, often repayment with a premium or conversion at the cap | Cap form: the greater of the money back or the value of converting into common stock |
| Company dissolves | Paid as a creditor, ahead of all stockholders | Junior to debt; ranks like non-participating preferred stock |
| Documents | Negotiated note purchase agreement and note | Short standard forms, free on Y Combinator’s documents page |
Our explainer what is a SAFE goes through the cap, discount and MFN versions of the SAFE in more detail.
How does each one convert in a priced round?
Each converts into the preferred stock sold in the round at the lower of two prices: the price implied by the valuation cap and the round price minus any discount. The difference is the amount that converts. A note converts its principal plus accrued interest, while a SAFE converts only the amount paid.
A worked example with made-up numbers
A startup takes $500,000 on a convertible note with 6% simple annual interest, a 20% discount and a valuation cap. It also takes $500,000 on a SAFE with a cap. To keep the arithmetic simple, assume both caps work out to $0.80 per share. Eighteen months later, it raises a Series A at $2.00 per share.
- Note amount to convert: $500,000 plus 18 months of interest at 6% ($45,000) equals $545,000.
- Note conversion price: the discount price is $1.60 (80% of $2.00); the cap price is $0.80. The lower one, $0.80, applies.
- Note shares: $545,000 divided by $0.80 equals 681,250 shares.
- SAFE shares: $500,000 divided by $0.80 equals 625,000 shares.
The note holder ends up with 56,250 more shares for the same check, entirely because of interest. In real deals the two caps are measured differently: many notes use a pre-money cap, while Y Combinator’s current SAFE uses a post-money cap, which fixes the holder’s ownership percentage before the new money. The distinction is explained in our guide to pre-money vs post-money valuation.
What happens when a convertible note reaches its maturity date?
At maturity, the noteholder can generally demand repayment of principal and interest if the note has not converted. In practice, a young company rarely has the cash, so the parties usually extend the maturity date, convert the note at a price set in the note, or negotiate new terms. The note’s maturity clause and any amendment provisions decide which option is available and whether a majority of noteholders can bind the rest.
This is the clock a SAFE does not have. A startup that never raises a priced round and keeps operating leaves its SAFEs outstanding indefinitely, with no date on which investors can ask for their money.
What happens if the startup is sold or shuts down first?
In a sale before conversion, both instruments usually give the investor a choice between getting money back and taking the value of shares at the cap. Y Combinator’s cap SAFE pays the greater of the purchase amount or what the holder would get if the SAFE had converted into common stock. Notes vary; some pay principal plus a premium, such as a multiple of the principal, and some convert at the cap.
In a shutdown, the ranking matters. Noteholders are creditors, so they are paid alongside other creditors before any stockholder. Y Combinator describes a SAFE as junior to outstanding debt and ranking like standard non-participating preferred stock, which puts it ahead of common stock; in a failed startup that often leaves little or nothing.
Why would a startup choose one over the other?
Founders often prefer a SAFE because the forms are standard, there is no debt on the balance sheet, and no maturity date can force a repayment conversation. Investors sometimes prefer a note because interest increases their stake and the maturity date and creditor status give them leverage if the company stalls. Some investors and regions are more used to one form than the other.
Both are securities. A startup selling either under Regulation D generally files a Form D with the SEC, which is often the only public record of the raise. The questions to ask before signing either are the same: what is the cap, is there a discount, what triggers conversion, and what happens in a sale.
Bottom line
To compare two offers, convert both into the number of shares you would receive at a plausible Series A price, including interest on the note. That one figure captures the cap, discount and interest together. A startup attorney should review any note’s maturity and default clauses before signing, because those terms differ far more than SAFE terms do.
FAQ
Is a SAFE better than a convertible note?
Neither is better in general. A SAFE is simpler and avoids debt for the company; a note gives investors interest, a maturity date and creditor status. The right choice depends on what each side values.
Does convertible note interest get paid in cash?
Usually not. Interest typically accrues and converts into shares along with the principal. It is paid in cash only if the note is repaid, for example at maturity or in a sale, as its terms provide.
Can a SAFE convert into common stock?
In a priced round, Y Combinator’s standard SAFE converts into preferred stock. In a sale or IPO before any priced round, the cap SAFE’s payout is measured as if it had converted into common stock. The conversion clause in the signed document controls.
