Convertible notes and simple agreements for future equity (SAFEs) are two of the most common tools for early-stage fundraising. In the third quarter of 2024, 88% of preseed funding rounds on private capital software Carta were SAFEs and 12% were convertible notes. While both are designed to help startups raise capital before they set valuations, they behave very differently once a priced equity round happens. Understanding how they work can lead you toward a clean cap table and away from long-term friction.

Below, we’ll explain how convertible notes and SAFEs differ, how they convert, and how to choose the right structure for your stage, investors, and growth plans.

What's in this article?

• What is a convertible note vs. SAFE?
  
• What are the differences between convertible notes and SAFEs?
  
• How does a convertible note work at conversion?
  
• How does a SAFE convert in a priced equity round?
  
• How do valuation caps and discounts affect founder dilution?
  
• When should a startup choose a convertible note vs. SAFE?
  
• How Stripe Atlas can help
  

What is a convertible note vs. SAFE?

Convertible notes and SAFEs are two common tools that startups use to raise preseed capital. Both allow businesses to raise funds before an exact initial valuation is made.

Convertible notes

A convertible note is a short-term loan that’s designed to turn into equity later, usually when the business raises its next priced funding round. A startup can use it to raise capital quickly without setting a valuation up-front while providing investors with a structured, familiar instrument.

SAFEs

A SAFE is an agreement that gives an investor the right to receive equity in the future, typically when the business raises a priced equity round. SAFEs are meant to make early-stage fundraising faster and simpler by removing the mechanics of debt.

What are the differences between convertible notes and SAFEs?

Convertible notes and SAFEs are both designed to help startups raise money before they lock in a valuation. Although they look similar on the surface, they behave very differently in practice.

Here are some of the differences between convertible notes and SAFEs:

• Legal structure: A convertible note is debt that’s expected to convert into equity. A SAFE represents a contractual right to receive equity in the future.

• Repayment obligations: Convertible notes must be repaid if they don’t convert, which offers protection for investors. SAFEs have no repayment requirement, even if the business never raises another round.

• Interest: Convertible notes accrue interest over time, which increases the amount that converts into equity. SAFEs don’t accrue interest; instead, the investment amount stays fixed until conversion.

• Maturity date: With convertible notes, a maturity date creates a deadline for conversion, repayment, or renegotiation. SAFEs can remain outstanding indefinitely.

• Conversion trigger: Convertible notes typically convert only when a qualifying financing round occurs or at maturity under negotiated terms. SAFEs convert automatically at the next priced equity round, regardless of size.

• Complexity: With convertible notes, interest, maturity, and debt treatment have to be tracked. SAFEs are simpler to issue and manage, and faster to close.

• Investor leverage: Convertible notes give investors leverage through debt mechanics such as maturity and default rights. SAFEs rely entirely on future equity events and offer fewer enforcement tools.

• Founder experience: Convertible notes introduce timing pressure and balance sheet risk. SAFEs trade that pressure for simplicity, flexibility, and fewer moving parts.

How does a convertible note work at conversion?

Conversion is the moment when a convertible note turns from debt into equity. It occurs when a business raises a qualifying priced equity round. The definition in the convertible note determines qualification.

The amount that converts is the original principal plus any accrued interest, which increases the total dollar value being exchanged for shares. Convertible notes usually convert into the same class of preferred stock issued in the priced round. They confer the same rights and preferences that new investors receive. Once the note is converted, it disappears as debt and becomes equity. This increases the total share count and dilutes founders and existing shareholders accordingly.

If the note reaches maturity before a priced round, investors might have the right to demand repayment, extend the note, or negotiate an alternative conversion.

How does a SAFE convert in a priced equity round?

A SAFE converts when the business raises its next priced equity round. There are no thresholds, deadlines, or debt mechanics. When the business issues preferred stock in a priced equity round, the SAFE converts automatically, regardless of the size of that round.

Since SAFEs don’t accrue interest over time, the amount that converts is the same as the original investment amount. SAFE holders usually receive the same class of preferred stock issued in the round, with identical economic rights. Conversion increases the total share count at the moment of the priced round, which dilutes founders and existing shareholders. With postmoney SAFEs, the investor’s ownership percentage is fixed relative to the business’s capitalisation after all SAFEs convert, which makes dilution more predictable compared with premoney SAFEs.

How do valuation caps and discounts affect founder dilution?

Valuation caps and discounts determine how much early investors are rewarded for taking on risk—and consequently how much ownership founders lose. They work similarly for both SAFEs and convertible notes, but there are some differences.

Here’s how they shape ownership dilution for founders:

• Discounts: A discount reduces the price per share that convertible investors pay compared to new investors. This increases the number of shares investors receive for the same investment.

• Valuation caps: A valuation cap sets the maximum valuation used to calculate an investor’s conversion price. This means that if the business’s actual valuation is higher at the next round, investors receive more shares. Valuation caps usually have a larger effect on dilution than discounts, especially when valuations rise quickly between rounds.

• Best-price rule: When both a valuation cap and a discount apply, the investor typically converts using whichever method gives them more shares.

• Stacking effects: Having multiple notes or SAFEs with caps can compound dilution because each converts into equity and increases the total share count simultaneously.

• Postmoney SAFEs: Postmoney SAFEs set an investor’s ownership percentage. This means that any additional SAFEs dilute founders rather than earlier SAFE holders.

• Interest on notes: With convertible notes, accrued interest increases the conversion amount. This slightly increases dilution compared to SAFEs, which keep the investment amount fixed.

• Founder visibility: Caps and discounts defer dilution until conversion. This can make ownership shifts feel sudden if outcomes aren’t modeled in advance.

When should a startup choose a convertible note vs. SAFE?

To choose between a SAFE and a convertible note, decide how much structure you want regarding timing, risk, and investor leverage. In general, SAFEs are more flexible, while convertible notes provide more structure.

Consider the following:

• Speed and simplicity: SAFEs have minimal legal overhead and no ongoing obligations (e.g., interest, repayment deadlines). They work well when you want to raise capital quickly.

• Investor expectations: When investors expect debt-like protections (e.g., interest, a defined maturity timeline), convertible notes can be a better fit.

• Timing: Convertible notes are often used to support a business until a near-term round, especially when there’s confidence that a financing event is coming soon. SAFEs are more suitable when the timing of your next priced round is unclear, since there’s no maturity date that forces a decision.

• Risk allocation: SAFEs shift more risk to investors by removing repayment rights. Convertible notes rebalance this risk.

• Geographic norms: In systems where SAFEs are less common or poorly understood, convertible notes might align better with local legal and investor expectations.

How Stripe Atlas can help

Stripe Atlas sets up your company’s legal foundations so you can fundraise with SAFEs, open a bank account, and accept payments within two business days from anywhere in the world.

Join 100K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z, and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You'll choose your company structure, instantly confirm whether your company name is available and add up to four co-founders. You'll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers and then e-sign all your documents. Any co-founders will receive emails inviting them to e-sign their documents, too.

Fundraising with SAFEs

After incorporating your C corporation (C corp), Atlas helps you obtain board approval to fundraise and send SAFEs to investors. After signing a SAFE, your investors can transfer funds to the bank account of your choice.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your Employer Identification Number (EIN). Founders with a US Social Security number, address and mobile phone number are eligible for IRS expedited processing, whilst others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g. copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at $100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal income taxes. Atlas will file it for you – whether you are a US or non-US founder – with USPS Certified Mail and tracking. You'll receive a signed 83(b) election and proof of filing directly in the Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world's leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution and tax compliance.

$50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance and operations from industry leaders like AWS, Carta and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you'll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payment volume.

Learn more about how Atlas can help you set up your new business quickly and easily or get started today.