SAFEs vs Convertible Notes: Comparing the Dilution Impact on Your Cap Table

You've found investors ready to write checks for your first round. But you face a seemingly simple question: SAFE or convertible note?

The instrument you choose impacts your dilution at Series A, your relationship with investors, your tax complexity, and even your ability to raise future rounds. Make an uninformed decision, and you might face unwanted pressure from maturity dates, unexpected dilution from accrued interest, or investor confusion that slows your next raise.

The good news: for most situations, there's a clear answer. The key is understanding when each instrument makes sense for YOUR specific circumstances.

This guide provides a complete decision framework based on your specific situation, backed by the math that shows exactly how each choice affects your ownership. For detailed conversion mechanics, see our deep dives on how SAFEs convert and how convertible notes convert.

All SAFE examples in this guide use post-money SAFE mechanics. Percentages are rounded to two decimal places for readability. The calculations in the web app use full precision, which may produce slightly different share counts.

The Core Differences: SAFEs vs Convertible Notes

Here's the primary differences between these instruments:

SAFEs are simpler, cheaper, and don't create time pressure. Notes offer investor protections (interest, maturity dates) that some investors require, but add administrative overhead and time pressure.

SAFEs best for: Tech pre-seed and seed rounds ($500K-$3M), first-time fundraisers, speed-focused raises, uncertain timelines to Series A.

Notes best for: Bridge rounds from existing investors, traditional investor bases, non-tech industries, situations where investors insist.

The Math Difference: Side-by-Side Comparison

Let's look at real numbers to see how SAFEs and convertible notes create different outcomes.

Example 1: Valuation Cap Conversion (High Series A Valuation)

Setup:

• Seed investment: $1,000,000
• Valuation cap: $5,000,000
• Discount: 20%
• Time to Series A: 18 months
• Pre-conversion cap table: 10,000,000 shares (80% founders, 20% option pool)
• Series A: $20,000,000 pre-money valuation, $5,000,000 raised (20% ownership)

Since the Series A valuation ($20M) is well above the cap ($5M), both instruments convert at the cap price. The only difference is interest accrual.

SAFE Conversion:

• Amount converting: $1,000,000 (no interest)
• Ownership target: $1,000,000 / $5,000,000 = 20%
• Post-SAFE total shares: 10,000,000 / (1 − 0.20) = 12,500,000
• SAFE shares issued: 12,500,000 − 10,000,000 = 2,500,000
• Ownership: 2,500,000 / 12,500,000 = 20.00%

Convertible Note Conversion (6% annual interest):

• Time elapsed: 18 months = 1.5 years
• Interest accrued: $1,000,000 × 6% × 1.5 = $90,000
• Total converting: $1,000,000 + $90,000 = $1,090,000
• Cap price: $5,000,000 / 10,000,000 = $0.50/share
• Note shares: $1,090,000 / $0.50 = 2,180,000
• Ownership: 2,180,000 / 12,180,000 = 17.90%

Difference: In this example, the SAFE investor ends up with MORE ownership (20% vs 17.90%).

Example 2: Discount Conversion (Lower Series A Valuation)

Same setup, but:

• Series A: $4,000,000 pre-money valuation (below the $5M cap)

Now the discount determines conversion because the Series A valuation is below the cap. The interest impact becomes more pronounced.

SAFE Conversion:

• Discount-adjusted investment: $1,000,000 / (1 − 0.20) = $1,250,000
• Ownership target: $1,250,000 / $4,000,000 = 31.25%
• Post-SAFE total shares: 10,000,000 / (1 − 0.3125) = 14,545,455
• SAFE shares issued: 14,545,455 − 10,000,000 = 4,545,455
• Ownership: 4,545,455 / 14,545,455 = 31.25%

Convertible Note Conversion (6% annual interest):

• Total converting: $1,090,000 (with 18 months of interest)
• Series A PPS: $4,000,000 / 10,000,000 = $0.40/share
• Discount price: $0.40 × (1 − 0.20) = $0.32/share (wins over $0.50 cap price)
• Note shares: $1,090,000 / $0.32 = 3,406,250
• Ownership: 3,406,250 / 13,406,250 = 25.41%

Difference: The note creates 4.67% less ownership than a SAFE (20.33% vs 25%) to the Seed Investor.

Side-by-Side Comparison (After Series A):

Decision Framework for Choosing Your Instrument

Now that you understand how these instruments convert differently, here's a framework for choosing the right one for your specific situation:

Step 1: Investor Requirements

Are you raising a bridge round from existing investors who previously invested on notes?

• Yes → Strong bias toward convertible notes. Existing investors expect consistency.
• No → Continue to Step 2.

Do any investors explicitly require maturity dates and interest?

• Yes, and they're meaningful investors → Use notes or risk losing them.
• Yes, but they're small checks → Consider whether their terms should dictate your round.
• No → Continue to Step 3.

Step 2: Investor Profile

Are your investors primarily tech/startup-savvy (angels, VCs, former founders)?

• Yes → Strong bias toward SAFEs. This is what they expect.
• Mixed → Continue to Step 3.
• No (traditional business owners, family offices, non-tech professionals) → Bias toward notes unless you can educate them on SAFEs.

Step 3: Speed and Simplicity

Is closing speed critical (need to close in days, not weeks)?

• Yes → SAFEs close faster due to standardized docs.
• No → Continue to Step 4.

Are you raising from many small checks (10+ investors)?

• Yes → SAFEs' standardization significantly reduces complexity.
• No → Continue to Step 4.

Step 4: Your Situation

Do you know when your Series A will happen?

• Yes, within 12-18 months → Either instrument works. Lean toward SAFEs for simplicity.
• Uncertain, could be 24+ months → SAFEs avoid maturity pressure.
• Very uncertain (experimental, might pivot) → Strongly favor SAFEs. You don't want maturity deadlines.

Do you have tax reasons to prefer interest deductibility?

• Yes (profitable, generating taxable income) → Notes provide deductions.
• No (typical pre-revenue startup) → This doesn't favor either instrument.

Understanding Investor Perspectives

Different investor types have strong preferences based on their background and portfolio strategy:

Angel Investors

Tech angels (former founders, tech executives) typically prefer SAFEs:

• Familiar with Y Combinator's (YC) template
• Value speed and simplicity
• Understand simultaneous conversion benefits
• Often investing in 10-50+ companies (standardization helps)

Traditional angels (successful business owners, doctors, lawyers) often prefer notes:

• Familiar with debt instruments from traditional business
• Value maturity date as downside protection
• Expect interest as compensation for risk
• May have accountants/attorneys who prefer debt treatment

Venture Capital Firms

Seed-stage VCs overwhelmingly prefer SAFEs:

• Standardized terms reduce legal costs across portfolio
• Simultaneous conversion simplifies cap table modeling
• No maturity date pressure aligns with long-term view
• YC template is familiar to their counsel and future investors

Bridge investors (VCs in later rounds providing bridge financing) often use notes:

• Short timeline to next round makes maturity reasonable
• Interest compensates for bridge risk
• Existing relationship justifies debt structure
• May want forcing function to ensure next round closes

Regional Variations

Silicon Valley and tech hubs: SAFE-dominant. Some funds invest exclusively on SAFEs.

East Coast and traditional markets: More mixed. Convertible notes still common, especially outside of purely tech deals.

International investors: Varies widely. Some countries have no equivalent to SAFEs, making notes more familiar.

Hybrid Approaches: Raising on Both Instruments

What if half your investors want SAFEs and half want notes?

Option 1: Pick One and Stick With It

Choose the instrument that fits your majority investors and your own preferences. If a few investors prefer the other instrument, explain your choice. Most will accept it if the terms (cap, discount) are fair.

Option 2: Offer Both

Sometimes you need to accommodate different investor preferences:

• Split investor base: Half your investors are tech angels (want SAFEs), half are traditional (want notes)
• Bridge + new money: Existing noteholders extend via new notes; new investors join on SAFEs
• Institutional requirements: A lead investor has fund rules requiring one instrument; angels prefer the other

Important: This adds complexity. Notes convert before SAFEs (debt has priority), which affects the conversion mechanics.

Conversion Order and Why It Matters

When you have both SAFEs and notes, they convert in this legally-mandated order:

Notes → SAFEs → New Investment

This order reflects legal priority:

1. Convertible notes convert first because they're debt. Debt holders have priority over equity holders in liquidation, so they convert first when you raise an equity round.
2. SAFEs convert second using the post-note share count as the baseline. This means SAFEs see the dilution from note conversions before they calculate their own conversion.
3. New priced round investment happens last, after both notes and SAFEs have converted.

This sequence ensures legal priority is respected: debt (notes) senior to quasi-equity (SAFEs) senior to new equity.

Example: Mixed Round with $1M Note + $1M SAFE

Setup:

• $1M convertible note: $5M cap, 6% interest, 18 months to Series A
• $1M SAFE: $5M cap, 20% discount
• Series A: $20M pre-money, $5M raised

Step 1: Note converts first (debt priority)

• Interest accrued: $1,000,000 × 6% × 1.5 = $90,000
• Total converting: $1,090,000
• Effective valuation: $5,000,000 (cap applies since Series A is at $20M)
• Cap price: $5,000,000 / 10,000,000 = $0.50/share
• Note shares issued: $1,090,000 / $0.50 = 2,180,000
• Post-note total shares: 12,180,000
• Note ownership: 2,180,000 / 12,180,000 = 17.90%

Step 2: SAFE converts second (YC ownership method)

• Amount converting: $1,000,000 (no interest)
• Pre-SAFE shares: 12,180,000 (post-note base)
• SAFE ownership target: $1,000,000 / $5,000,000 = 20%
• Post-SAFE total shares: 12,180,000 / (1 − 0.20) = 15,225,000
• SAFE shares issued: 15,225,000 − 12,180,000 = 3,045,000
• SAFE ownership: 3,045,000 / 15,225,000 = 20.00%

Mixed Round Progression:

Result: The conversion methods differ between instruments:

1. Notes convert at cap price: shares = amount / (cap / pre-shares)
2. SAFEs convert via YC method: ownership = amount / cap, then solve for shares

This means the note investor gets fewer shares than if they'd used a SAFE, despite accruing interest. The SAFE's guaranteed ownership percentage (20%) outperforms the note's cap-price conversion.

Managing complexity: Model the conversion before closing. Understand the exact dilution from each instrument and the combined effect to prevent surprises when your Series A actually converts everything.

Comparison: Mixed Round vs Two SAFEs (After Series A)

What if both investors had used SAFEs instead of mixing instruments? Here's how the outcomes compare:

Key insight: The note investor ends up with less ownership (11.46%) than a SAFE investor (16%) despite accruing interest, due to the different conversion methods explained above.

Red Flags by Instrument

Some terms should make you pause before signing. Beyond the immediate dilution impact, aggressive early-stage terms create problems when you raise your next round. Series A investors will scrutinize your cap table and may view unfavorable seed terms as a red flag about your judgment or desperation:

SAFE Red Flags

Convertible Note Red Flags

Key Takeaways

1. For most seed rounds, SAFEs are simpler and faster. The YC template is standardized, legal costs are lower, and tech investors expect them. Default to SAFEs unless you have specific reasons to use notes.
2. Interest accrual compounds over extended timelines. While notes may create less dilution than SAFEs at typical 12-18 month horizons (due to different conversion methods), extended delays of 24+ months allow interest to accumulate and eventually tip the scales.
3. SAFEs eliminate maturity pressure. If your Series A takes longer than expected, notes create awkward conversations about extensions or repayment. SAFEs simply wait until you raise, whenever that happens.
4. Traditional investors often prefer notes. If you're raising from family offices, high-net-worth individuals outside tech, or investors in non-tech markets, they may be more comfortable with the familiar debt structure of notes.
5. You can mix instruments, but conversion order matters. Notes convert before SAFEs due to legal priority: Notes → SAFEs → New Investment. Model the conversion order before closing to understand the dilution impact.
6. Watch for red flags in either instrument. Interest rates above 10%, maturity dates under 12 months, or non-standard conversion triggers suggest misaligned investor expectations. These are warning signs about the relationship, not just the terms.
7. Educate investors rather than defaulting to their preference. Many traditional investors have never seen SAFEs but will accept them once they understand the benefits. Don't assume you need notes just because an investor hasn't seen a SAFE before.

Model Before You Decide

Choosing between a SAFE and convertible note is a legal and financial decision that directly impacts your ownership at Series A and beyond.

The best way to decide? Model both scenarios with your actual numbers:

• Your raise amount
• Your likely Series A timing
• Your expected Series A valuation
• The specific interest rate and maturity date (for notes)

See the ownership difference side-by-side. Understand exactly how much more dilution a note creates from interest accrual. Know what your cap table looks like under each scenario.

---

Not sure which instrument is right for your raise? Model both scenarios side-by-side with our free cap table tool. Input your raise amount, valuation cap, and timing to see the exact ownership impact of SAFEs vs notes before you decide.

Try Our Cap Table Calculator to Compare SAFE vs Note Outcomes →