Convertible Note vs SAFE: Key Distinctions

A convertible note is a loan that, under certain conditions, ceases to be a debt and becomes capital. A SAFE—Simple Agreement for Future Equity—does not require repayment or interest: it is a formalized promise to obtain shares at a later date. Discussing convertible note vs SAFE means understanding how these instruments really work, what changes for investors, what protections they provide, and in which situations one is more suitable than the other. This is an issue of international importance, especially for startups, business angels, and venture capital lawyer professionals active in early-stage financing.

What Is a Convertible Note?

Convertible notes are financial instruments that—unlike standard loans—do not provide for repayment at maturity but rather conversion into shares in the company. These instruments accumulate interest over time and have a maturity date by which conversion should take place or, in some cases, be repaid if the conversion event does not occur. The contract also defines conversion terms, which may vary depending on specific timing and conditions. It is a solution created for the early stages, when it is still too early to accurately define the company’s value, and tools that can adapt to the context are needed, representing a key consideration in venture debt vs equity decisions.

What Is a SAFE (Simple Agreement for Future Equity)?

A SAFE is a hybrid financial instrument that falls halfway between debt and equity. Specifically, it is a contractual agreement whereby an investor obtains a future stake in a company without having to set a specific valuation of the business at the time of investment. There are basically four types of SAFEs:

• With Valuation Cap: This establishes a maximum value (the “cap”) at which the investment will convert into equity, regardless of the company’s future valuation.
• With Discount: In this case, it allows the investor to convert their capital into shares at a lower (discounted) price than what new investors will pay in the next round of financing.
• With Cap and Discount: Here, the SAFE has both of the above features. The investor will benefit from the most advantageous condition, obtaining the largest number of shares possible.
• With Most-Favored-Nation (MFN) Clause: With this clause, the investor has the right to convert their SAFE into any other type of instrument (e.g., a SAFE with cap or discount) or to adopt the most favorable conditions that the startup will provide to other investors in future financing rounds.

It is widely used by startups in the early stages to raise the funding needed for expansion and by investors who want to bet on a company’s growth potential, often addressing common venture capital issues related to valuation timing. The SAFE does not generate periodic payment obligations (such as coupons in convertible notes) and does not have a fixed maturity date.

Legal and Structural Differences

When analyzing convertible notes vs. SAFE, the main difference between the two instruments is immediately apparent. As mentioned, convertible notes are debt instruments: they have a predetermined maturity, may pay periodic coupons, and the investor assumes the status of creditor to the issuing company.

SAFEs notes, on the other hand, are hybrid financial instruments. They have no maturity or interest, and there is no default for non-repayment.

Convertible notes are similar to convertible bonds and therefore tend to integrate more easily into existing legal systems. 

Tax and Accounting Treatment

From a tax and accounting perspective, the differences between safe note vs convertible note are tangible and should not be overlooked. Convertible notes are a debt and, as such, are recorded on the startup’s balance sheet as a financial liability. Interest is deductible for companies, and the gain (or loss) on the subsequent transfer of the converted shares will be taxed as capital gains.

SAFEs, on the other hand, are generally recorded as a future capital increase or a component of equity or “equity financing” depending on local accounting regulations and the specific structure. Until conversion, the investment does not generate taxable income and will therefore only be taxed as capital gains upon the subsequent transfer of the shares.

Key Terms Compared

To better distinguish between SAFE vs convertible note, it is useful to analyze four fundamental aspects.

• Valuation Cap: This is present in both instruments and determines the maximum valuation of the startup at which the investment will be converted into equity.
• Discount Rate: Like the cap, this is common to both types of instruments. It allows the investor to convert their investment into equity at a reduced price.
• Interest Accrual: As we have already seen, this is a feature unique to convertible notes.
• Maturity Date: This also applies only to convertible notes. If the notes mature before the financing round, the startups must repay the principal plus interest.

Investor Perspective

For investors, SAFEs and Convertible Notes have tangible differences that can inevitably influence their choice. Convertible Notes, for example, by virtue of their debt nature, provide greater protection to investors thanks to interest payments and the right to redemption at maturity.

SAFEs notes are hybrid instruments that are simpler and faster but offer less protection in the event of non-conversion. Investors are not entitled to repayment and risk losing their capital if the startup fails to meet its targets.

Founder and Company Perspective

For the company and its founder, SAFEs and Convertible Notes are two preferable instruments in different situations and contexts. SAFEs notes are generally less burdensome administratively and legally and, due to their hybrid nature, do not accrue interest. In some jurisdictions, however, Convertible Notes are still preferable due to their greater legal recognition.

Accrued interest in Convertible Notes increases the capital to be converted into shares, causing slightly higher dilution for founders. SAFEs, on the other hand, do not accrue interest, making dilution more predictable and potentially lower, as it is based solely on initial capital.

When to Use Each Instrument

Both instruments find recommendations in different operational and financial scenarios. SAFEs are preferable for very early-stage financing rounds where acceleration and speed are priorities. This is due to their simplicity, very low legal costs, and standardization.

Conversely, Convertible Notes are more suitable for larger financing rounds or when international investors are involved due to their extensive international recognition.

Common Misconceptions

SAFEs are not always so simple in practice. In many jurisdictions, there is no legal clarity on the matter, causing tax and accounting ambiguity for startups. Another common mistake is to believe that Convertible Notes automatically convert the investment into equity. For this to happen, however, a specific event must occur—almost always a financing round. Otherwise, the investor will be reimbursed in cash.

Finally, the Cap and Discount should not be confused with fixed measures of company valuation. The Cap does not increase the company’s value but rather sets a maximum price per share at the time of conversion. 

The discount does not decrease the value of the company but reduces the price the investor pays for each share compared to investors in the next round.

The dilution for founders is calculated only at the time of conversion based on the valuation of the qualifying round and the application of these terms.

FAQs

What is the main difference between a SAFE and a convertible note?

A SAFE is not a debt instrument and does not have a maturity. A Convertible Note is a debt instrument with an interest rate and a maturity.

Is a SAFE or a convertible note better for early-stage start-ups?

It depends. A SAFE is more immediate, but a Convertible Note provides greater protection.

Can a SAFE expire or become repayable?

No. They are not debts and therefore do not have a repayment date.

How do investors make money with a SAFE?

Converting the SAFE into equity at a favorable rate in a future financing round.

What happens if the company is sold before conversion?

Again, it depends. Both instruments offer clauses for early termination, but the treatment varies depending on the agreement.

References

Gunderson Dettmer. (2024). Start-up Company & Venture Capital Law Blog. https://www.gunder.com/news/startup-company-venture-capital-law-blog

Drexler, J. & Sahlman, W. A. (2018). The Convertible Note: A Venture Capital Financing Instrument. Harvard Business School.  https://www.hbs.edu/faculty/Pages/item.aspx?num=53229

Cornerstone Research. (2025). Valuation of Early-Stage Firms Implied by SAFEs and Convertible Notes. https://www.cornerstone.com/wp-content/uploads/2025/01/Valuation-of-early-stage-firms-implied-by-SAFEs.pdf