SAFE, convertible note, or priced round?
The three ways early startups raise, what each costs founders in dilution, and when to use which.
Key takeaways
- SAFEs and convertible notes both defer the valuation question to a later priced round; a priced round sets the valuation now and issues actual equity.
- The two terms that drive dilution on a SAFE or note are the valuation cap and the discount, and only the more favorable of the two applies when the instrument converts.
- SAFEs are the US default (post-money SAFE since 2018), while Europe and France lean on convertible loan notes and BSA-AIR-style instruments for legal and tax reasons.
- Use a SAFE or note for speed and low cost at pre-seed; switch to a priced round once you have lead investor demand, a board, and enough certainty to negotiate a real number.
Every early-stage raise eventually comes down to a single structural choice: do you sell equity at an agreed price today, or do you take money now and price it later? That decision shapes how much of your company you give away, how fast you can close, and how much legal cost and complexity you take on before you have revenue to support it. Most founders raising their first external money will look at three instruments — the SAFE, the convertible note, and the priced equity round — and the right answer depends on your stage, your geography, and how much leverage you actually have.
None of these is inherently “better.” They are tools with different trade-offs, and the founders who raise well are the ones who understand the dilution math underneath each one rather than copying whatever their last accelerator batch used. This is general information, not legal or tax advice; instruments and their tax treatment vary by jurisdiction, so confirm specifics with counsel before you sign.
The SAFE: speed over certainty
A SAFE — Simple Agreement for Future Equity — is a short contract under which an investor gives you money today in exchange for the right to receive shares later, typically when you raise your next priced round. It is not debt: there is no interest, no maturity date, and nothing to repay. It is also not equity yet — the investor holds a promise that converts into shares at a future event.
Two terms do almost all the work:
- Valuation cap — the maximum valuation at which the SAFE converts into equity. It protects the early investor from being diluted by a high future price.
- Discount — a percentage (commonly 10–20%) off the price the priced-round investors pay, rewarding the early backer for taking earlier risk.
When both exist, the investor gets whichever produces more shares — not both stacked. A SAFE may also carry a most-favored-nation (MFN) clause, letting the holder adopt the better terms of any subsequent SAFE you issue before the priced round.
Since 2018 the standard has been the post-money SAFE, which is named for how its ownership math works: the cap reflects the company's value after all SAFE money is counted. This matters enormously to founders because it makes dilution from SAFEs transparent and additive — each SAFE's percentage is locked in regardless of how many more you issue, but that also means stacking several post-money SAFEs dilutes you more than founders often expect. Always model the total before signing the second one.
If you remember one thing about SAFEs: the cap and the discount don't add together. The investor takes the better of the two, and you should price your raise as if they will.
The convertible note: a SAFE with debt features
A convertible note is structurally similar — money now, shares later, with a cap and/or discount — but it is legally debt. That brings two extra mechanics:
- Interest rate — typically 4–8% per year, which usually accrues rather than being paid in cash, increasing the number of shares the note converts into.
- Maturity date — a deadline (often 18–24 months) by which the note must convert, be repaid, or be renegotiated. If you haven't raised a qualifying round by then, you are technically in default, which hands the investor leverage.
That maturity clock is the real difference. A SAFE can sit on your cap table indefinitely with no pressure; a note creates a hard date you must manage. For founders this is a double-edged feature — it disciplines the timeline but can become a problem if your next round slips.
The priced round: certainty up front
In a priced (or “equity”) round you and your investors agree on a valuation now and issue actual shares — usually preferred stock — immediately. There is no deferral and no conversion math later; everyone knows exactly what they own the day the round closes.
The cost is complexity. A priced round means real legal documents — a term sheet, share purchase and shareholders' agreements, often a board seat, liquidation preferences, anti-dilution provisions, and pro-rata rights. Legal fees run materially higher than a SAFE, and the negotiation takes longer. You typically need a committed lead investor willing to set the price before others follow.
The upside is clarity and governance. No surprises about who owns what, no stacked conversions hitting at once, and a clean foundation — which is part of why founders thinking seriously about structure often pair a first priced round with proper company and holding setup so the equity sits in the right entity from the start.
A simple dilution example
Suppose you raise €500k on a post-money SAFE with a €5M cap. That investor is buying 500,000 / 5,000,000 = 10% of the post-money company. Lock that number in.
Now imagine your priced round a year later comes in at a €10M pre-money valuation, and new investors put in €2M. Because your SAFE has a €5M cap, it converts as if the company were worth €5M — half the round price — so the SAFE holder's €500k buys roughly twice the shares it would at the round price. The cap, not the headline €10M, governs their conversion. The new €2M comes in at the higher price. Add a 20% discount instead of (or alongside) the cap, and the holder takes whichever gives more shares.
The lesson: a low cap is generous to early investors and expensive to you, and several capped SAFEs converting at once can dilute founders far more than the simple “10% here, 10% there” intuition suggests. Build the full conversion model before you stack instruments — understanding this math is one of the quiet reasons many companies struggle later, a theme we explore in why startups fail.
How the three compare
| Dimension | SAFE | Convertible note | Priced round |
|---|---|---|---|
| Legal complexity | Low | Low–medium | High |
| Sets valuation now? | No (cap only) | No (cap only) | Yes |
| Interest / maturity | None | Both | None |
| Typical stage | Pre-seed / seed | Pre-seed / seed (Europe) | Seed / Series A+ |
| Dilution clarity | Medium (clear post-money, but stacks) | Medium (interest adds) | High (known at close) |
US versus Europe: the geography matters
The SAFE is overwhelmingly a US instrument. In Europe — and France in particular — the standard tools are convertible loan notes and BSA-AIR-style agreements (a SAFE-equivalent built around share-subscription warrants). The reasons are practical: the original Y Combinator SAFE was drafted for Delaware corporate law and doesn't map cleanly onto French or other civil-law company structures, and tax treatment of conversions differs across jurisdictions. A BSA-AIR achieves a similar “fund now, price later” outcome while fitting local legal and tax frameworks.
So “just use a SAFE” is good advice in San Francisco and potentially the wrong advice in Paris. If you operate across borders, the choice of instrument and where your holding sits are linked decisions — the kind worth working through with experienced strategic guidance before you commit.
How to choose
A practical decision path:
- Raising a small first check fast, no lead investor yet? A SAFE (US) or BSA-AIR (France/Europe) is usually right — cheap, fast, and it defers the valuation fight to when you have leverage.
- Investors want debt features or a maturity-driven timeline? A convertible note fits, but watch the maturity date and model the accrued interest.
- You have a committed lead and want governance certainty? Do a priced round. Once you're negotiating board seats and pro-rata rights, the simplicity of deferred instruments stops being an advantage.
One subtle trap: deferring valuation feels founder-friendly because you avoid arguing about a number, but it doesn't make dilution disappear — it just moves it to the conversion. The discipline is to model every instrument's fully converted impact on your cap table before you sign, not after. If you're weighing whether to take this path alone or with an operating partner, it's also worth understanding the structural differences laid out in venture studio vs accelerator vs VC, since the funding instrument and the type of partner you raise from are often tied together. At Garan we tend to favor instruments that keep early cap tables clean and dilution transparent, because the founders who track that math from day one are the ones who still control their company at Series A.
If you'd like a second pair of eyes on a term sheet or a cap-table model before you commit, get in touch — and confirm the legal and tax specifics with qualified counsel in your jurisdiction.
Frequently asked questions
Is a SAFE debt or equity?
Neither, strictly. A SAFE is a contractual right to receive equity in the future, with no interest and no repayment obligation. It only becomes equity when it converts at a triggering event, usually your next priced round.
Do the valuation cap and discount stack?
No. When a SAFE or note has both, the investor receives shares based on whichever term is more favorable to them — the cap or the discount — not both combined. You should always price your raise assuming the more dilutive of the two applies.
What happens if a convertible note reaches its maturity date before I raise again?
Technically the note is due, which can mean repayment, conversion at a default mechanism, or renegotiation. In practice many founders extend or amend the note, but maturity gives the investor real leverage, so manage the timeline deliberately.
Why are SAFEs less common in France and Europe?
The SAFE was drafted for US (Delaware) corporate law and doesn't map cleanly onto civil-law structures, and conversion tax treatment differs. France and much of Europe use convertible loan notes and BSA-AIR instruments instead, which achieve a similar deferred-valuation outcome within local legal frameworks.
When should I switch from a SAFE to a priced round?
Once you have a committed lead investor willing to set a valuation, and you want governance certainty like a defined board and clear ownership. The added legal cost and complexity of a priced round are worth it when the round is large enough and the deferral no longer buys you speed.
How does a low valuation cap affect me as a founder?
A lower cap means your early investors convert at a more favorable price and therefore receive more shares, increasing your dilution. Combined with several stacked instruments converting at once, a generous cap can cost founders far more equity than the headline percentages suggest.