What is the difference between a convertible note and a SAFE?
Short answer
A convertible note is commonly described as a loan that later converts into equity, often with interest and a maturity date. A SAFE is commonly described as a simpler agreement tied to future equity. Both often use a cap or discount. Many investors I hear from dislike SAFEs more than notes, and many prefer a priced round over both.
The core difference is debt
A convertible note is often described as a loan, with interest and a date when it matures, that may later convert into shares. A SAFE is often described as an agreement tied to future equity, with different terms on interest and timing. Documents vary, so check the exact terms with securities counsel.
What a New York angel group told me
I interviewed Angela, who is part of an angel club of about 80 investors in New York. She said her group is neutral between convertible notes and priced equity. Right now she sees about 60% convertible notes, 30% priced equity and 10% SAFEs.
In this interview, Angela explains how her angel club splits its deals between notes, priced equity and SAFEs.
Summary and key takeaways from this video
"We will do SAFEs, but there needs to be a cap on it and a discount on it."
She also tells founders that a lot of New York investors hate SAFEs, and that this can make fundraising harder. I take that seriously. The paper you choose changes who will say yes.
Why notes keep showing up even when investors want a priced round
On a panel of technology investors, one said they were seeing more convertible notes since the pandemic. Founders doubted they could raise a full round, so they took a bridge to get 12 to 18 months of runway. Another panelist said they have argued against convertible notes and that SAFEs are even worse. That panelist said most investors prefer a priced round because they know what they are getting.
That same panelist explained why notes are popular anyway. A priced round can cost 30 to 50,000 dollars in attorney fees in Silicon Valley. For a very early company, that is a lot of cash to spend on paperwork.
This panel clip shows investors debating notes, SAFEs and priced rounds, and why founders reach for convertible debt.
Summary and key takeaways from this video
How I think about choosing one
A note or SAFE lets both sides put off the valuation argument. That matters for pre-revenue companies. Family offices often value businesses on a multiple of profits, and a company with no revenue has a hard time justifying a number. A convertible note can ease that tension.
In this webinar I talk about pre-revenue raises and which structures I see most often in Series A tech deals.
Summary and key takeaways from this video
For Series A tech deals I see convertible notes most often. It depends on how sophisticated the investor is. An investor who knows your space and can add value may want straight equity so they share more of the upside.
Questions worth asking before you pick:
- Do your investors want a loan style claim with a maturity date, or a simpler right to future equity?
- Is there a cap, a discount or both?
- Can you afford a priced round now, or is a bridge enough?
- Which structure do the investors you are targeting actually accept?
Many founders then talk through the answers with securities counsel.
From my books and event talks
Deal structure is often overlooked, and I think that applies directly to the note versus SAFE choice. Structuring a deal differently can change whether right now is a very hard time to raise or not, and whether the investor feels protected. I have not done convertible notes myself, and in my experience a company that cannot yet be valued often has little to show. So before you choose either paper, ask what the structure does for the investor and whether a priced round would serve you better.
"One thing often overlooked is deal structure. Structuring a deal differently can make a difference in whether right now is a very hard time or not, or whether you're protected by collateral or not."
From the source
- One New York angel club described its current mix as about 60% convertible notes, 30% priced equity and 10% SAFEs.
- One panelist said a priced round can cost 30 to 50,000 dollars in attorney fees in Silicon Valley.
- Founders are using convertible notes as a bridge to get 12 to 18 months of runway instead of raising a full round.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: AdTech, Managed Health, HealthTech, and Seed Stage Angel Investor Mandate Interview, Investor Discussion Panel - Technology Investor Mandates - Feedback from Investors on Where Tech ..., Capital Raising Frequently Asked Questions Webinar. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around convertible note terms, SAFE document terms and offering documents. Do not use AI to write your own legal agreements.
Next moves
- 1List the investors you plan to approach and ask which structure they prefer.
- 2Decide whether you need a bridge or can afford a priced round now.
- 3If you consider a note or SAFE, many founders talk to their attorney about the cap and discount.
- 4Many founders ask securities counsel to review the documents.
People also ask
Does a SAFE have interest or a maturity date?
Terms vary by document. Many describe a SAFE as not being debt and a note as carrying interest and a maturity date, so it helps to read each document closely with counsel.
Why do some investors dislike SAFEs?
Angela told me a lot of New York investors hate them, and one panelist said SAFEs are even worse than notes. That panelist also said most investors prefer a priced round because they know what they are getting.
Should a pre-revenue startup use a note or a SAFE?
It depends on your investors and your costs. A note can ease valuation disagreements, and many founders talk to securities counsel about the structure.
Related questions
- How does revenue-based financing work for growing companies?Revenue-based financing gives a company capital in exchange for a share of its sales until the investor is repaid.
- What is a most favored nation clause for investors?A most favored nation clause, or MFN, says that if the sponsor gives another investor better terms, you can ask for those terms too.
- How does a distribution waterfall work?A distribution waterfall is the order in which a deal pays out cash.
- How do I structure an earnout in an acquisition?Tie part of the purchase price to how the business performs after closing.
Work through it with the how much to raise calculator. See all deal structuring resources.