When raising early-stage funding, founders are often introduced to two flexible financing tools: the SAFE (Simple Agreement for Future Equity) and the Convertible Note. Both are convertible equity: they are treated on the balance sheet as debt until they convert into equity ownership in the company at a future date. While both help startups raise capital without a full valuation, they come with different terms, risks, and legal consequences.
Both are forms of convertible equity startup founders use: treated as debt until they convert into ownership at a later date. A company is basically saying to its early investors that we don’t know what our value is today, but in the future we will. To reward you for investing in us early, we will give you a discount to whatever the later investors will pay to invest in our company.
At Faison Law Group, we work with founders to navigate SAFE vs. Convertible Note funding and choose the option that aligns with your business goals and growth timeline.
What Is a SAFE?
A SAFE agreement is a contract that gives investors the right to receive equity in your company in a future priced round, usually at a discount or with a valuation cap. Introduced by Y Combinator in 2013, SAFEs have become increasingly popular due to their simplicity and speed. Below are common characteristics of a boilerplate SAFE, although they can be customized for every deal.
Key Features of a SAFE:
● No maturity date
● No interest rate
● Converts to equity in a future priced round
● May include a valuation cap and discount rate SAFE agreements often use to reward early investors
What Is a Convertible Note?
A Convertible Note is a security instrument that converts into equity under certain conditions, typically during a future fundraising round. Unlike SAFEs, Convertible Notes typically come with interest rates and maturity dates, however, like any contract, they can be customized for each deal.
Key Features of a Convertible Note:
● Has a maturity date (often 12-24 months)
● Accrues interest (usually 4–8%)
● Converts to equity upon a qualified financing convertible note trigger, typically defined by the size of the future round
● May include a valuation cap, discount, and conversion triggers
● Legally treated as debt until it converts
SAFE vs. Convertible Note: How Do They Compare?
Both financing tools have their pros and cons. Choosing between them depends on your company’s needs, investor expectations, and risk tolerance. Unlike a convertible note vs equity round, both SAFEs and Notes defer valuation, letting you raise before setting a definitive company worth.
| Feature | SAFE Agreement | Convertible Note |
| Interest | ❌ None | ✅ Yes (typically 4–8%) |
| Maturity Date | ❌ No | ✅ Yes |
| Risk for Founders | ✅ Lower risk | ❌ Higher risk if unpaid |
Common Mistakes Founder Make
With a SAFE:
● Agreeing to a MFN (“most favored nations”) whereby if one investor is offered better terms all investors, including earlier investors must be given the same terms.
● Failure to revise the definition of “Company Capitalization” which affords investors EXTREME anti-dilution protection at the expense of founder equity (Post Money SAFEs only)
● Forgetting to file the securities exemption with the SEC or relevant states
With Convertible Notes:
● Not agreeing to an automatic conversion at an agreed valuation in the event the Company does not have a Qualified Financing before the Maturity Date.
● Forgetting to file the securities exemption with the SEC or relevant states
How Faison Law Group Can Help
We help founders understand the legal and financial implications of SAFE vs. Convertible Note structures, negotiate investor-friendly terms, and ensure full compliance with securities laws at both federal and state levels.
Check out our full guide on SEC Compliance for Startups for more on how to legally issue equity, notes, or SAFEs.
Final Thoughts: Choose the Right Tool for Your Raise
There is no one-size-fits-all answer in the SAFE vs. Convertible Note debate. The best choice depends on your timeline, your investors, and your company’s roadmap. Work with experienced legal counsel to choose the structure that protects your interests while keeping investors engaged.
Need Legal Help Drafting a SAFE or Convertible Note?
At Faison Law Group, we simplify startup fundraising by helping founders choose and implement the right instruments. From drafting agreements to managing SEC compliance, we’re here to support your capital raise at every stage.
Schedule a consultation to discuss your fundraising strategy with our startup lawyers today.
The information provided herein is for general informational purposes only and does not constitute legal advice, nor does it create an attorney-client relationship. You should consult a qualified attorney for advice regarding your specific legal situation or compliance obligations.