"I’m not ready for VCs yet" — What now?
Startup Valuation 101 – Edition #3. SAFE vs Convertible Notes - What is right for you?
Hey founders,
Welcome to another edition of My Unicorn Club - The Startup Newsletter. It's a biweekly FREE newsletter written by those on this side of the table (VCs & Investors) for those on that side (Founders & Startup Enthusiasts).
Last week, we discussed in detail about Pre and Post Money Valuation and how not knowing it can cost up to 10% in equity. Read it here
Today we're diving into one of the most common questions I get: "Should I use a SAFE or convertible note for my first raise?"
Before we dive in, try this free tool to simplify your valuation decisions.
Pre-Money ↔ Post-Money Valuation Calculator
Cap Table clarity in 60 seconds. First 50 users get it for FREE
Raising a round? This calculator helps you instantly visualize ownership, dilution, and valuation — no spreadsheets or second-guessing.
What it does:
📌 Input your pre-money valuation, round size, and ESOP %
📌 Instantly get post-money valuation, share price, dilution %
📌 Fully diluted cap table with founder, investor, and option pool breakdownWhy it matters:
Clear ownership % → Know exactly what you’re giving away
Real-time scenario modeling → Model new rounds in seconds
Founder-friendly → Built to remove ambiguity from early-stage fundraising
Example: Input a $4M pre-money and $1M raise → get your share price, investor % (18%), and ESOP impact at a glance.
After seeing founders struggle with this decision—often choosing the wrong instrument or getting caught off guard by conversion terms—I wanted to create a clear guide that walks through both options and helps you make the right choice for your specific situation.
The Problem Most Founders Face
Here's what typically happens: You're ready to raise your first round, but you're not ready for the complexity and expense of a priced equity round. Your lawyer mentions SAFEs and convertible notes, but the explanations are confusing, and you're not sure which one protects your interests as a founder.
The stakes are higher than you might think. Choose the wrong instrument, and you could face unexpected dilution, unnecessary interest payments, or conversion terms that work against you when you raise your Series A.
Let me walk you through both options so you can make an informed decision.
Understanding Convertible Securities
Both SAFEs and convertible notes are "convertible securities"—financial instruments that let you raise money now and convert that investment into equity later, typically during your next priced round.
The key advantage? You can raise capital without setting a valuation today. This matters because most early-stage startups haven't established clear metrics to determine their worth, and the market hasn't validated their value yet.
SAFEs: The Founder-Friendly Option
SAFE stands for Simple Agreement for Future Equity. Think of it as an agreement that says: "Give me money now, and I'll give you equity later when we do a proper funding round."
Here's what makes SAFEs attractive:
No debt burden: Unlike convertible notes, SAFEs aren't loans. There's no interest accruing, and no maturity date hanging over your head. You won't wake up in 18 months facing a repayment deadline.
Conversion flexibility: SAFEs typically convert at any dollar amount you raise in your next preferred stock round. You're not locked into raising a specific minimum amount.
Two key flavors: Pre-money SAFEs convert based on your company's value when the SAFE investor first invested. Post-money SAFEs convert based on your company's value right before the new round. Post-money SAFEs give investors more certainty about their ownership percentage.
Convertible Notes: The Traditional Approach
Convertible notes are debt instruments that convert into equity during a future financing event. They come with interest rates (typically 6-8%) and maturity dates (usually 12-24 months).
Here's how they work: If you raise $100,000 on a convertible note with 8% interest and a one-year maturity, you'll owe $108,000 if you haven't raised a priced round by the maturity date.
The upside? Convertible notes often include more investor-friendly terms, which can make them attractive to certain investors who want that extra protection.
Key Differences That Matter
Let me break down the critical differences:
Maturity dates: Convertible notes have them, SAFEs don't. This means convertible notes create pressure to raise your next round before the maturity date, or you'll need to repay the investment with interest.
Interest accrual: Convertible notes accrue interest (usually 6-8% annually), increasing the amount that converts into equity. SAFEs don't accrue interest, so your dilution is more predictable.
Conversion triggers: Convertible notes typically require you to raise a minimum amount (often $1-2 million) to trigger automatic conversion. SAFEs usually convert at any amount raised in a preferred stock round.
Valuation caps and discounts: Both can include these investor-friendly terms, but they work similarly in both instruments.
Real-World Example: How This Plays Out
Let's say you're raising $500,000 for your startup:
SAFE scenario: You issue a post-money SAFE with a $5 million valuation cap. Eighteen months later, you raise a Series A at a $10 million pre-money valuation. Your SAFE converts at the $5 million cap, giving the investor 10% of your company ($500K ÷ $5M = 10%).
Convertible note scenario: You issue a convertible note with 8% interest and a $5 million valuation cap. Eighteen months later, the note has accrued $60,000 in interest ($500K × 8% × 1.5 years). The $560,000 total converts at the $5 million cap, giving the investor 11.2% of your company.
The difference? The convertible note resulted in an extra 1.2% dilution due to interest accrual.
When to Choose Each Option
Choose a SAFE when:
You want to avoid debt on your balance sheet
You're uncertain about your next round timeline
You want maximum flexibility on conversion terms
You're raising from angels or early-stage investors who are comfortable with SAFEs
Choose a convertible note when:
Your investors specifically prefer debt instruments
You want the optionality of repaying instead of converting
You're raising from more traditional investors who are familiar with convertible notes
You're confident about your next round timeline and can beat the maturity date
The Bottom Line
For most first-time founders, SAFEs are the better choice. They're simpler, more founder-friendly, and eliminate the pressure of maturity dates and interest accrual.
That said, the specific terms matter more than the instrument type. A founder-friendly convertible note might be better than a SAFE with aggressive terms.
Action Steps for This Week
Audit your current fundraising plans: Are you considering convertible securities? Make sure you understand the dilution impact of your choices.
Review your investor conversations: Are your potential investors comfortable with SAFEs, or do they prefer convertible notes? This might influence your decision.
Consult your lawyer: Don't make this decision alone. A good startup lawyer can help you understand the implications of each choice for your specific situation.
Calculate the scenarios: Model how different instruments and terms would affect your ownership after conversion. The math matters more than you think.
Quick Favor
Found this helpful? Hit reply and let me know which part was most valuable. I use your feedback to shape future editions.
Until next time, keep building!
P.S. Forward this to any founder friends who might be fundraising—they'll appreciate the clarity.
Resources:
Pre-Money ↔ Post-Money Calculator (Free for 50 users)