Raising your first round of capital is a big milestone, but it comes with tough decisions. Two of the most common tools for early-stage fundraising are SAFEs and convertible notes. Both can help you close investors before a formal valuation, but their terms and impact on your company can differ.

If you’re an international founder or operating without a CFO, navigating these options can feel overwhelming. This guide breaks down SAFE vs convertible note—so you can decide what’s best for your startup.

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What is a SAFE?

A SAFE (Simple Agreement for Future Equity) is an investment contract created by Y Combinator in 2013. It lets investors give you money now in exchange for the right to buy equity in your company later—usually at a discount or with a valuation cap, once you raise your first priced round.

• No debt: SAFEs aren’t loans and have no interest or maturity date.
• Founder-friendly: They’re simple, quick, and often favored in early-stage US startup rounds.
• Dilution happens later: Investors convert their SAFE into shares at a later funding round.

What is a convertible note?

A convertible note is a short-term debt instrument that converts into equity during a future financing round. Investors lend you money, and instead of getting paid back, their investment “converts” into shares (often at a discount or cap) when you raise your next round.

• Debt structure: It acts as a loan until it converts.
• Has interest and maturity: If the note doesn’t convert by a certain date, you may need to repay it, or renegotiate terms.
• Familiar for investors: Many international and traditional investors are used to convertible notes.
  
  

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Key differences between SAFE and convertible note

Legal structure

SAFEs are agreements for future equity, not debt, while convertible notes are structured as short-term debt that converts to equity.

Interest and maturity

SAFEs do not accrue interest and have no maturity date. Convertible notes accrue interest (usually 2–8%) and have a maturity date—meaning they must convert or be repaid within a set timeframe.

Repayment obligation

With a SAFE, you don’t have to worry about paying back the investor if things go wrong. With a convertible note, you may have to repay the principal plus interest if the note doesn’t convert.

Complexity and negotiation

SAFEs are usually faster and less complex, with standardized terms. Convertible notes can involve more negotiation around the interest rate, maturity date, and repayment terms.

Risk to the company

SAFEs don’t create debt on your balance sheet. Convertible notes are considered debt until they convert, which can create additional risk for your startup.

Investor familiarity

SAFEs are now widely used in the US and favored by early-stage investors, while convertible notes may be more familiar to traditional and international investors.

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SAFE: Pros and cons

Pros:

• Simple and fast to execute
• No interest or repayment obligation
• No maturity date (less pressure on founders)
• No debt on your balance sheet

Cons:

• Not as familiar to some international investors
• Less negotiating room for investor protections
• Can accumulate and create dilution if used in multiple rounds
  
  

Convertible note: Pros and cons

Pros:

• Familiar to both US and international investors
• May offer more flexibility for complex deals
• Includes investor protections (like interest and maturity date)
  
  

Cons:

• Adds debt to your balance sheet until conversion
• Requires negotiation of more terms
• Pressure to convert or repay by maturity date
• Interest accrues over time, increasing potential dilution
  
  

How to choose: A quick checklist

Use this checklist to figure out whether a SAFE or convertible note fits your fundraising goals:

• Speed vs. certainty: Need to close fast, with fewer negotiations? SAFEs are often quicker.
• Investor preference: Are your investors familiar with SAFEs, or do they expect convertible notes?
• Risk tolerance: Can your startup handle debt obligations, or do you prefer to avoid them?
• International deals: Outside the US, convertible notes are often better understood.
• Deal size: For smaller, early-stage checks, SAFEs might be more practical.
  Company stage: Are you pre-revenue or early growth? SAFEs are often used at the earliest stages.
• Future funding plans: Do you expect to raise a priced round soon, or are you uncertain?

If you’re unsure, talk to a legal expert—choosing the right instrument can impact your startup’s next round, cap table, and relationships with investors.

FAQ: SAFE vs Convertible Notes

What’s cheaper for legal costs—SAFE or convertible note?
SAFEs are usually cheaper and faster to draft and close, with standardized templates.

Can I use SAFEs outside the US?
Yes, but not all investors outside the US are familiar with SAFEs. Convertible notes may be easier to negotiate with international investors.

What happens if a convertible note reaches maturity?
If your company hasn’t raised a qualifying round by the maturity date, you might have to repay the note or renegotiate. This adds pressure that SAFEs avoid.

Is there a risk of giving up too much equity with either instrument?
Both instruments can dilute your ownership if you raise at a low valuation cap or accumulate multiple notes/SAFEs. Always consult with legal or financial advisors to understand the dilution impact.

What about taxes?
Convertible notes can have tax implications if not converted or if interest is paid. SAFEs generally have fewer tax issues for founders, but always check with your advisor.

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Book a call with our legal team

Still deciding between a SAFE and a convertible note?
Book a free call with Lazo’s legal experts—we’ll review your options and help you choose the right structure for your next round.

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