SAFEs, notes and angel rounds
Convertible Notes vs SAFEs: Which Should a Startup Use in 2026?
The short answer
A convertible note is a loan that converts into equity at the next priced round, usually at a discount or under a valuation cap, and accrues interest until it converts; if it has not converted by its maturity date, the investor can in principle demand repayment. A SAFE has the same conversion economics without interest, maturity or creditor status. SAFEs have become the default at pre-seed in the United States, while notes remain common for bridge rounds, for investors whose rules require debt, and outside the US. For founders, the SAFE is usually simpler and safer; the note is acceptable if maturity and repayment terms are founder-friendly.
Key numbers
| Term | Convertible note (market) | Post-money SAFE (market) | Source |
|---|---|---|---|
| Interest | 4% to 8% simple, at least the IRS applicable federal rate | None | Venture Deals; Acceleration |
| Maturity | 12 to 24 months (18 to 24 common) | None | Same |
| Discount | 15% to 25%, 20% most common | 20% when included | Same |
| Valuation cap | Common, usually pre-money | Standard, post-money | Carta 2025 |
| Legal status | Debt | Contract right to future equity | |
| Share of pre-seed money in SAFEs (historical anchor) | 89% in Q4 2023 | Carta | |
| Pre-seed money on SAFEs and notes combined | $10.4B across 50,316 instruments | Carta, 2025 |
Side by side
| Feature | Convertible note | SAFE |
|---|---|---|
| What the investor holds | A promissory note (debt) | A right to future shares |
| Interest | Accrues and usually converts into shares | None |
| Maturity | Yes; repayment or conversion at maturity must be addressed | None |
| Conversion trigger | "Qualified financing" above a minimum size (often around $1M) | Any bona fide preferred stock financing |
| On a sale before conversion | Often repayment plus a premium (1x to 2x) or conversion at the cap | Greater of purchase amount and as-converted amount at the cap |
| In insolvency | Creditor, ahead of all equity | Behind creditors, ahead of common |
| Amendments | Usually by majority in principal of the notes | Individually, or as provided in the form |
| Documents | Note purchase agreement and a note per investor | One short standard form (YC) |
| Typical cost | Higher (negotiated terms) | Lower (standard form) |
Worked example: converting a note and a SAFE in the same round
Before the Series A, Acme has 10,000,000 fully diluted shares. It raised:
- Note: $500,000, 6% simple interest, 18 months outstanding, 20% discount, $8,000,000 pre-money cap.
- SAFE: $500,000, post-money cap $8,000,000.
The Series A prices the shares at $1.50.
Note. Accrued interest = $500,000 x 6% x 1.5 years = $45,000. Conversion amount = $545,000. Discount price = $1.50 x 80% = $1.20. Cap price = $8,000,000 / 10,000,000 = $0.80. The note converts at the lower price, $0.80: 545,000 / 0.80 = 681,250 shares.
SAFE. Ownership just before the round is fixed at $500,000 / $8,000,000 = 6.25% of the capitalization including the SAFE itself, so its conversion price is lower than $0.80 and it receives more than 625,000 shares.
Two differences explain the outcomes. First, interest: the note converts $545,000, not $500,000, which adds 56,250 shares. Second, the cap definition: the note's pre-money cap divides by 10,000,000 shares that exclude the converting instruments, while the SAFE's post-money cap fixes a percentage that includes them.
The cap, not the discount, drove both outcomes, as it usually does when a startup raises its priced round well above the cap.
Why SAFEs took over at pre-seed
- No maturity risk. A note that reaches maturity before a priced round gives investors leverage: they can demand repayment, which most startups cannot afford, and use that leverage to renegotiate.
- No creditor status. Directors of an insolvent company owe duties that take creditors into account; outstanding notes can complicate decisions in a cash crunch.
- Speed and cost. The YC SAFE is a short, standard form that investors already know.
- No interest accounting. Notes accrue interest that converts into more shares and must be tracked per investor.
When a note can be the better choice
- Bridge rounds between priced rounds, where existing investors want a creditor position and a short maturity.
- Investor requirements. Some funds, corporate investors or foreign investors prefer or must hold debt.
- Outside the United States, where the SAFE has no settled legal treatment and convertible loans are familiar.
- When the investor insists and the terms are founder-friendly: long maturity, automatic conversion or extension at maturity, and majority amendment.
Note terms to negotiate
| Term | Founder-friendly | Investor-friendly |
|---|---|---|
| Interest | 2% to 5%, simple, paid in shares | 8% or more, compounding |
| Maturity | 24 months or more, with automatic extension or conversion at the company's option | 12 months, repayment at the investor's option |
| Conversion at maturity | At the cap, into common or a standard preferred | At a low "maturity valuation" chosen by the investor |
| Sale before conversion | Repayment of principal plus interest, or conversion at the cap | 2x to 3x repayment premium |
| Security | Unsecured | Secured by company assets and IP |
| Qualified financing threshold | Low (for example $1M of new money) | High, so the note does not convert in a small round |
| Amendments | Majority in principal binds all | Each holder must consent |
Red flags
- Investor-option conversion at maturity at a valuation far below the cap, which turns the maturity date into a repricing.
- A security interest over IP in an early-stage note.
- Warrants plus a discount (a "double dip").
- Supermajority amendment thresholds that let one holder block an extension.
- Repayment premiums of 2x or more on a sale.
Tax and legal points
- Interest rate. To be respected as debt and avoid imputed interest issues, note interest should generally be at least the IRS applicable federal rate (AFR) for the term.
- Holding period. For investors, the QSBS holding period for stock received on conversion of debt generally starts at conversion, not when the note was purchased. For SAFEs the treatment is uncertain; the conservative view is the same. See QSBS after the 2025 changes.
- Securities law. Both instruments are securities. Use Regulation D (or Regulation S for offshore investors), get accreditation information and file Form D. See securities law for startup fundraising.
- State usury laws can apply to notes in some states; Delaware choice of law and business-purpose exemptions usually address this.
How to choose: a short decision guide
- First outside money, US investors, standard terms wanted: post-money SAFE with a cap.
- Existing investors bridging to a priced round within 6 to 12 months: either; a note is acceptable with a maturity beyond the expected closing and automatic conversion at the next round.
- Investor requires debt (some corporate, family office or foreign investors): note, with founder-friendly maturity and amendment terms.
- Company may never raise a priced round (cash-flow business): consider whether equity financing is the right tool at all; both instruments assume a future priced round or a sale.
- Non-US company: use the local convertible instrument your counsel recommends, or one of YC's non-US SAFE versions if the company is in Canada, the Cayman Islands or Singapore.
Frequently asked questions
Is a SAFE better than a convertible note for founders?
Usually yes: no interest, no maturity and no creditor status. A note with a long maturity, low interest and automatic conversion can be nearly as founder-friendly.
What happens when a convertible note matures?
The terms decide. Typical outcomes are an extension agreed by a majority of noteholders, conversion at a pre-agreed valuation, or repayment. Investors rarely want cash back from a growing company, but maturity gives them negotiating leverage.
Does note interest convert into shares?
Usually yes. Accrued interest is added to the principal and converts at the same price.
Can I convert notes into SAFEs?
Yes, with each noteholder's agreement (or the required majority if the note allows). The exchange should be documented and approved by the board.
Do convertible notes have valuation caps?
Most early-stage notes do. Historically note caps were pre-money; check the definition, because it changes the conversion price.
What is a qualified financing?
The priced round that triggers automatic conversion, usually defined by a minimum amount of new money (for example $1M excluding the notes). Smaller rounds may convert only with the noteholders' consent.