Hannah Ley
Impulse4Women
They are considered two of the most popular early-stage startup funding instruments: SAFE and Convertible Note. On the surface, they appear to be very similar – yet they certainly do not work the same way.
The Convertible Note and SAFE (Simple Agreement for Future Equity) are two common funding agreements between startup founders and investors. In both cases, investors provide money to a startup today in exchange for equity later, typically when the company raises a future priced round. The instruments support founders raising money in the early stages. They are often used when they do not want to set a company valuation yet, for instance if they are working on an idea or MVP.
While the core concept is similar, each tool has its own structure, advantages, and geographic preferences – so where do they differ?
What is a Convertible Note – and who gives them out?
A Convertible Note is the more traditional approach and works as a loan. The startup owes it back and usually converts it to equity later. It typically includes an interest rate, ranging commonly from 4 to 8 percent. Most agreements have a maturity date: That is when the loan is due – if it has not turned into shares at a future funding round, so-called priced round, yet. This date typically ranges between 12 and 24 months. Investors also get a discount or a valuation cap, a maximum price, for the shares they acquire, so they get more for their early risk.
Many investors rely on this instrument for multiple reasons. There are fewer legal requirements than issuing shares in a priced equity round. Apart from that, investors gain protection through the interest and set maturity date. If no priced round happens, the loan may be repaid or renegotiated.
However, Convertible Notes are also known to be a more difficult approach. Since it is technically a loan, it involves a lot of paperwork. Terms like interest, maturity or repayment are typical topics of discussions between founders and investors.
Venture capitalists, particularly in countries with strong regulatory frameworks (such as European countries), often prefer them because of the added investor protection. Early-stage funds, business angels, and even friends and family investors may choose Convertible Notes when they want legal safeguards or a fallback option if the startup does not raise a priced round.
How does the SAFE work – and who uses it?
A SAFE is the more modern approach and works, unlike the Convertible Note, not as a loan – but as a contract that gives investors the right to receive equity in the future. The startup does not owe it back, and there is no interest. SAFEs do not have a maturity date, meaning there is no deadline by which the agreement must convert or be repaid. It converts only when a priced round or another agreed-upon event happens.
In this case, investors also receive a discount or a valuation cap as a reward for investing early. These terms help ensure they get a better deal than later investors. It’s important to note that if both a cap and a discount are present, the SAFE typically converts at whichever calculation provides the lower price per share for the investor at the time of conversion.
Many early-stage investors prefer SAFEs due to their simplicity. Compared to Convertible Notes, they are faster to close and involve less legal complexity. Originally, they were created by Y Combinator to simplify and improve upon the Convertible Note as an early-stage funding instrument. Since then, they have become a common standard for seed and pre-seed rounds, especially in the United States.
It is important to realize that SAFEs also come with tradeoffs. Since there is no maturity date or repayment obligation, some investors may feel they have less protection compared to debt instruments and are hesitant to take the risk. This also means that if a priced round never happens, the SAFE might never convert, leaving the investor with an illiquid instrument. In regions where legal systems are more conservative or debt protections are preferred, this tool might therefore be seen as too vague.
Accelerators, like Y Combinator (which created the SAFE), rely on it heavily. Many angel investors and pre-seed venture funds prefer SAFEs because they are fast to close, simple to understand, and require less negotiation than equity rounds or debt instruments.
Popularity depends on the country
Which investors prefer SAFE over Convertible Note? What does the distribution world-wide look like? Chances are a European investor will have a different approach to a funding agreement than someone based in the United States.
As they were invented in the US, SAFEs quickly became the default, especially in Silicon Valley. The simplicity, speed and low legal cost are seen as appealing by both early-stage startups and investors. Canada, most notably tech hubs like Toronto and Vancouver, are certainly influenced by US-American venture practices and increasingly adopt SAFEs.
In Australia and New Zealand, SAFEs have become the more popular fundraising instrument as well. While Convertible Notes are still used, their popularity for early seed rounds has been decreasing.
On the contrary, the European market is leaning heavily towards Convertible Notes. Especially countries like Germany, France or Spain prefer the investor protection provided by maturity dates, interest and legal enforceability. Moreover, local laws and tax regulations are more aligned with debt-like instruments.
In India, Convertible Notes are standard as they comply with the existing regulatory framework. SAFEs, as drafted and used in the U.S. (like Y Combinator’s SAFE), are not recognized under Indian law without substantial legal structuring or modification.
Similarly, Singapore traditionally works with Convertible Notes, as the legal situation is better suited for this agreement. It should be noted that SAFEs are gaining more traction there as well.
The United Kingdom uses both agreements, depending on investor preferences. However, instead of SAFEs, many startups use the Advance Subscription Agreements (ASA). They work similarly to SAFEs but are designed to comply with SEIS/EIS, UK tax relief schemes.
What is the situation like in emerging markets? Generally, it is a mix of both agreements, depending on legal baselines, investor preference and international influences. In Latin America, SAFE variants like the YC SAFE or local adaptations are growing in popularity, especially in Brazil and Mexico. Many African countries commonly use Convertible Notes. As the legal and investor landscape in those countries is still developing, more traditional, legally clearer agreements are often preferred.
Similar concepts – Key Differences
| SAFE | Convertible Note | |
| Legal Nature | Equity-like agreement | Debt instrument |
| Repayment Obligation | ❌ | ✅ (if not converted before maturity) |
| Interest Rate | ❌ | ✅ (typically 4–8%) |
| Maturity Date | ❌ | ✅ (often 12–24 months) |
| Complexity | Simple to draft and faster to close | More complex (involves negotiating terms) |
| Investor Protection | Less protection (no legal recourse if it doesn’t convert) | More protection (debt status gives legal leverage and fallback options) |
