SAFE vs convertible note vs priced round: how each works and which to use

• SAFE: fastest and simplest; YC's post-money SAFE has been its standard since 2018 and has no maturity date.
• Convertible note: debt with interest and a maturity date; check whether the cap is pre-money.
• Priced round: price set now, more legal work, often a board seat; many use NVCA model documents.
• On a post-money SAFE, ownership sold equals amount invested divided by the cap.
• Keep a running total of every SAFE so stacked caps don't surprise you.
• SAFE investors should be accredited, and a Form D notice is due within 15 days after a company's first sale under Rule 506.

The three ways to raise early money

At pre-seed and seed, you'll almost always use one of three instruments. Each one decides when the price of your company gets set, how much paperwork you need, and how much control investors get.

How a SAFE works

A SAFE (Simple Agreement for Future Equity) was created at Y Combinator in 2013. YC describes it as a short contract an investor signs to fund your startup now in exchange for the right to shares later, converting automatically when you raise a priced round. YC's forms are free to download and use, and you don't need to be a YC company to use them.

YC publishes three US versions of the post-money SAFE: valuation cap with no discount, discount with no valuation cap, and an "uncapped MFN" with neither, plus an optional pro rata side letter. The post-money SAFE has been YC's standard since 2018.

• Valuation cap: the highest valuation at which the SAFE converts. If your priced round is above the cap, SAFE holders convert at the cap.
• Discount: a lower price than new investors pay, for example 20% off.
• Post-money: the cap includes the SAFE money itself, so the ownership you sell equals the amount invested divided by the cap.
• MFN: no cap or discount; the investor takes the terms of any better SAFE you issue later.
• Pro rata rights: the right to invest in a future round to keep their percentage. In YC's documents this lives in a separate side letter, not the SAFE.

YC's own rule of thumb: start from how much you want to raise and how much ownership you're willing to sell. Raising $1M for 15% implies a post-money cap of about $6.7M.

How a convertible note works

A convertible note is short-term debt that converts into equity at your next priced round. Like a SAFE, it usually has a valuation cap and/or a discount. Unlike a SAFE, it accrues interest (which typically converts into extra shares) and has a maturity date, when the note is technically due if it hasn't converted. Founders and investors then negotiate an extension, a conversion, or repayment.

Notes are common in bridge rounds and with investors, including some angels and family offices, who prefer the protections of debt. Read the cap carefully: many notes use a pre-money cap, which dilutes founders more than a post-money cap of the same number.

How a priced round works

In a priced round you agree a pre-money valuation, divide by your fully diluted share count to get a price per share, and sell new preferred shares at that price. A lead investor usually negotiates a term sheet that sets valuation, board composition, investor rights and protective provisions.

Many US priced rounds are papered with documents based on the National Venture Capital Association's model legal documents, which NVCA publishes free. The core financing set includes a certificate of incorporation, stock purchase agreement, investors' rights agreement, voting agreement, and right of first refusal and co-sale agreement. Expect more legal time and cost than a SAFE, and more governance afterwards.

Worked example: the dilution math

All numbers below are hypothetical and simplified (no option pool top-up, no other converting securities). Use them to understand the mechanics, then run your own numbers with your lawyer.

Starting point. Founders hold 9,000,000 shares and there's an unissued option pool of 1,000,000 shares: 10,000,000 fully diluted.

Pre-seed. You raise $1,000,000 on post-money SAFEs with an $8,000,000 cap. Ownership sold = $1M ÷ $8M = 12.5%.

Seed, 18 months later. You raise $3,000,000 at a $12,000,000 pre-money valuation, with the SAFEs converting in the pre-money.

1. SAFE shares: the SAFE holders must own 12.5% of the company just before the new money. Shares = 12.5% × 10,000,000 ÷ 87.5% = 1,428,571. Their price works out to $8,000,000 ÷ 11,428,571 = about $0.70 per share.
2. Seed price: $12,000,000 ÷ 11,428,571 pre-money shares = $1.05 per share.
3. New seed shares: $3,000,000 ÷ $1.05 = 2,857,143.
4. Post-money: 14,285,714 shares × $1.05 = $15,000,000.

The SAFE investors paid about $0.70 per share while seed investors paid $1.05: that's their reward for going early. Founders went from 90% to 63% across two rounds.

The same pre-seed as a convertible note (simplified). Suppose instead you raised $1,000,000 on a note with 6% simple interest, a 20% discount and an $8,000,000 pre-money cap, converting after 18 months. Accrued interest is $1,000,000 × 6% × 1.5 = $90,000, so $1,090,000 converts. If the seed price were $1.20, the discount price would be $0.96 and the cap price $8,000,000 ÷ 10,000,000 = $0.80. The note converts at the lower of the two, $0.80, into 1,362,500 shares. Interest and a pre-money cap both add dilution compared with a post-money SAFE at the same headline number.

The same pre-seed as a priced round. Selling $1,000,000 at a $7,000,000 pre-money ($8,000,000 post) means a price of $0.70 and 1,428,571 new shares, 12.5% today. The ownership matches the post-money SAFE in this simple case; the difference is that you pay for a full set of documents now, and investors may get board and voting rights.

Watch out for stacking SAFEs

Because SAFEs are easy, founders sometimes raise several on rising caps without adding up the total. YC's example: $500K at a $5.5M cap (about 9%) plus $500K at an $8.3M cap (about 6%) equals about 15% sold. That's fine when it's deliberate. Keep a running table of every SAFE and its cap, and know your total dilution before you sign the next one.

Which should you use?

• Use a SAFE for most pre-seed rounds, especially when you're raising from many angels in small checks and want to close each one as it's ready.
• Use a convertible note when a key investor insists on debt features, or for a short bridge between priced rounds.
• Use a priced round when a lead investor is writing a large check and wants a board seat and full rights, usually at a larger seed or Series A.

Outside the big hubs, some angels and family offices are less familiar with SAFEs and may ask for a note or a priced round. Explain the trade-offs in plain terms and let your lawyer handle the drafting.

Legal basics every founder should know

• Accredited investors. YC says SAFE investors should be accredited. Under the SEC's definition, individuals qualify with net worth over $1 million excluding their primary residence, or income over $200,000 ($300,000 with a spouse or partner) in each of the prior two years with the same expected this year, or with certain professional licenses (Series 7, 65 or 82).
• Regulation D. Most early rounds rely on Rule 506(b), which allows unlimited money from accredited investors but no general solicitation, or Rule 506(c), which allows general advertising only if every buyer is accredited and you take reasonable steps to verify it.
• Form D. Under both rules, the company files a notice on Form D with the SEC within 15 days after its first sale of securities, and states may require their own notice filings.
• Board approval. YC notes your board must approve issuing SAFEs.

This is general information, not legal advice. Use a startup lawyer for your round.

Before you sign: a checklist

• Is the cap pre-money or post-money?
• Is there a discount, and does the investor get the better of cap or discount?
• For notes: interest rate, maturity date, and what happens at maturity
• Any side letters (pro rata, information rights, MFN)?
• Your total dilution across every SAFE and note outstanding
• Investor accreditation confirmed
• Board consent signed and Form D filing on your lawyer's calendar

Ready to raise? Build your list with how to raise pre-seed without a network and find pre-seed investors who back your sector and city.