SAFE vs. Convertible Note: How to Compare the Terms

Compare a SAFE and a convertible note by modeling cash, conversion, timing and ongoing obligations side by side. A cap is only one input. Record interest, maturity, financing triggers, repayment terms, amendment rules and side rights before deciding which questions need professional advice.

This is general US startup education, not a recommendation to choose an instrument. Use actual proposed documents. The deliverable is a reliable comparison and adviser issue list, not an automatically generated contract.

Compare obligations before labels

A standard YC SAFE has no interest or maturity date. A convertible note is debt with interest and maturity terms in its documents. See YC’s explanation and Cooley’s convertible-debt primer. Do not assume note interest starts only at maturity; the instrument governs accrual while outstanding.

Reaching maturity has no single universal result. Counsel should interpret repayment, election, extension, default and conversion provisions. A SAFE’s lack of maturity does not guarantee a financing or eventual conversion.

Extract comparable fields

Instrument comparison checklist

Distinguish not applicable from not checked. A blank cell is not evidence that an obligation does not exist.

Work an interest-and-discount example

Fictional proposals: Both invest $100,000. Assume an eligible financing exactly one year later at $2 per new-investor share, a 20% conversion discount, and no cap effect. The note has 5% simple annual interest, assumed to convert at the same discounted price. These are teaching inputs, not typical terms.

Conversion price = $2 × (1−20%) = $1.60
SAFE shares = $100,000 ÷ $1.60 = 62,500
Note interest = $100,000 × 5% × 1 = $5,000
Note converting amount = $105,000
Note shares = $105,000 ÷ $1.60 = 65,625

The note creates 3,125 additional conversion shares under these assumptions. This is not yet an ownership percentage because the complete post-round denominator is undefined. It also does not determine which proposal is better.

If no eligible financing occurs before note maturity, the calculation does not answer the central issue. Review the maturity provisions and cash consequences rather than pretending conversion occurred.

Prepare three outcomes

1. Expected financing: apply the actual conversion trigger and compare cap/discount paths.
2. Delayed or smaller financing: check trigger thresholds, continuing interest and maturity decisions.
3. Sale or shutdown: identify contractual treatment, ranking, proceeds and adviser questions.

Report cash received, modeled shares, obligations and unknowns separately. Do not promise fixed legal costs or closing speed from the instrument’s name.

Document A / B / exact versions: [ ]
Amount / funding status: [ ]
Cap definition / discount / interaction: [ ]
Conversion trigger: [ ]
Interest / accrual dates / conversion treatment: [ ]
Maturity / repayment / elections: [ ]
Sale / dissolution clauses: [ ]
Side letters / rights / amendments: [ ]
Expected / delayed / non-financing scenario: [ ]
Cash effect / shares / open interpretation: [ ]
Attorney and accountant questions: [ ]

Verify the comparison

Common errors include automatically stacking cap and discount benefits, omitting accrued interest, modeling compound interest as simple, treating unfunded signatures as cash, and comparing pre-money and post-money caps without adjustment.

• Every term has a document locator.
• Interest dates and conventions match the assumed instrument.
• No percentage appears without the complete denominator.
• A no-financing case is visible.
• Advisers review obligations before signing.

Clarify pre/post SAFE definitions and prepare a term-sheet issue list for deeper review.

Informational disclaimer

We are not lawyers. This article is for general education only and is not legal, tax, accounting or investment advice. Check with your attorney or accountant before acting on it.