What’s the practical difference between a SAFE and a convertible note?

A SAFE is not debt and typically has no interest or maturity; it converts into equity on agreed triggers. A convertible note is debt with interest and a maturity date that converts to equity or may require repayment if no conversion event occurs.

How do valuation caps affect founders during equity funding?

Valuation caps lower the conversion price for early investors, increasing the number of shares they receive at conversion and thereby increasing dilution for existing holders. Model caps and discounts together to see the real impact.

What’s an easy way to lower dilution in the next round?

Right-size the option pool to near-term hiring, raise only what’s needed to hit milestones, and negotiate realistic caps and discounts on future SAFEs/notes.

Should I mix different SAFE terms in one round?

Avoid mixing where possible. Different caps and discounts—plus MFN clauses—create uneven outcomes and surprises at conversion.

Can I convert SAFEs/notes before a priced equity funding round?

Sometimes. Some deals allow pre-closing conversions or standardized amendments, but changes can require investor consent. Model first; then amend if it meaningfully improves outcomes.

Equity Funding, SAFEs, Convertible Debt & Dilution

Q: How do I calculate dilution from multiple SAFEs with different caps and discounts?

List each SAFE’s terms, compute each conversion price (lower of discounted price or price implied by its cap), convert dollars to shares, total the new shares, and recompute fully diluted ownership. A proper equity financing model will automate this.

Q: What’s a fair discount for a SAFE or note?

Market varies, but founders commonly see 10%–25% discounts with caps reflecting current risk. Test founder-friendly vs. investor-friendly scenarios in your model before committing.

Q: How big should my option pool be before a priced round?

Size it for near-term hires, not multi-year plans. Over-sizing right before a round shifts more dilution to founders at the worst time.

Q: When does a convertible note’s interest matter?

At conversion. Accrued interest increases the total dollars converting, which increases the number of shares issued to noteholders.

Author: Carlos Heredia, Attorney

TLDR: SAFEs and convertible debt provide startups with fast capital without requiring early valuation negotiations, but they can lead to unexpected dilution (i.e., your ownership percentage decreases as more shares are issued) when it comes time to raise equity funding. Use an equity financing model to map how SAFEs and convertible debt affect future ownership before you launch your next round.

Imagine cruising along Pacific Coast Highway in your convertible. The sun’s out and momentum’s strong, but then the gas light starts to flicker. You need to fuel up so you can arrive on time at your next destination.

Translation in startup speak: You raised the seed round for your company with SAFEs or convertible debt. Given your current burn rate, you now need to raise a Series A (or another priced round) so that your company can reach the next milestone or achieve cash-flow breakeven.

Many early-stage founders raise capital through SAFEs or convertible debt because it delays valuation negotiations and offers quick funding. But this seemingly simple structure can lead to complex outcomes.

Let’s break it all down and put you in the driver’s seat.

What Are SAFEs and Convertible Debt — and Why Startups Use Them

SAFEs (i.e., Simple Agreements for Future Equity) and convertible debt are similar financing instruments where investors provide cash today with the expectation that it will convert into equity later (usually in your next priced equity funding round).

They’re common in early rounds because they delay setting a company valuation until more data is available, and the company’s valuation may be higher. However, the money you take now can have a significant impact on future ownership, so it is essential to understand in advance the consequences of the specific SAFE or note terms.

Key questions to answer up front:

Estimate dilution – How much ownership dilution will result when SAFEs/notes convert into the next round’s shares? Dilution results in a smaller slice of a bigger pie.
Apply discounts – How will the conversion discount reduce the next round’s price per share for SAFE/note holders?
Model valuation caps – If investors negotiated a valuation cap (a maximum company valuation used for their conversion math), how does that affect their price and your dilution?
Plan the next round – How can you set the next round’s terms (e.g., option pool size, price, round size) to better manage dilution from prior SAFEs/notes?

Related read: For a deeper dive on note terms before you raise, see our guide: Convertible Note Term Sheet: Key Protections for Startups.

Equity Financing Model with SAFE/DEBT Conversion

We have created an equity financing model and companion webinar that you can use to plan your next equity round. It handles the conversion mechanics for prior convertible debt and SAFEs, so you can see the impact before signing a term sheet.

Access the webinar and equity financing model here

Use the equity financing model either:

Before the SAFE/note financing, to preview how conversion will affect your next round and cap table, or
After a SAFE/note financing but before the next round, to model conversions and compare term‑sheet options.

Quick setup checklist (5 minutes):

Gather each SAFE/note (cap, discount, MFN, interest rate; include issue dates).
Confirm your current cap table on a fully‑diluted basis (common, preferred, options, warrants, RSUs, SAFEs/notes).
Decide on target pre-money valuation, new money, and desired option pool post‑round.
Enter assumptions, then test low/medium/high valuation and round size cases.
Review post-money ownership and adjust before committing to terms.

1. Capture a Current Cap Table Snapshot

See your fully-diluted cap table and the ownership percentages for each class/security.

Example: Two co-founders hold 60% together, the option pool is 10% (unallocated), and outstanding SAFEs total $1.2M with varying caps.

2. Break Down SAFE/Convertible Debt Impact

Model the prior round’s effects, including:

For notes, accrued interest through closing, so the full conversion amount is accurate.
The conversion price for the new round after applying discounts and any valuation cap.
The resulting number of new shares issued to SAFE/note holders.

Plain‑English definitions:

Discount — a % reduction off the new round’s price per share.
Valuation cap — a ceiling on the company valuation used to calculate a lower conversion price for early investors.

3. Set Pre‑Money and Post‑Money Valuation

Estimate pre-money (value before new cash), total new investment, and resulting post-money valuation.

4. Calculate Share Price & Quantity for the New Round

Compute the price per share and number of shares to sell after factoring in the SAFE/note conversions and any option pool increase tied to the round.

5. See the Post‑Round Cap Table

Review the post-money, fully-diluted capitalization and ownership percentages by class/security.

6. Analyze Total Dilution

Understand dilution from both the new money and the SAFE/note conversions so you’re not surprised later.

FAQs:

What’s the practical difference between a SAFE and a convertible note?
A SAFE is not debt (no maturity date or interest) and converts into equity on agreed triggers. A convertible note is debt (with interest and maturity) that converts (or may require repayment if a conversion event doesn’t occur).
How do valuation caps actually affect founders?
Caps give early investors a lower conversion price, which increases their shares at conversion and increases dilution for existing holders. Model caps and discounts together to see the actual effects.
What’s an easy way to lower dilution in the next round?
Right-size the option pool (don’t over-inflate it), raise an amount aligned with milestones, and negotiate realistic caps/discounts on future SAFEs/notes.
Should I mix different SAFE terms in one round?
Avoid it where possible. Mixing caps/discounts (plus MFN clauses) creates a patchwork of outcomes that’s harder to model and can surprise everyone at conversion.
Can I convert SAFEs/notes before the priced round?
Sometimes. Certain deals allow for pre-closing conversions or standardized amendments, but changes may require the consent of the investors. Model first; then amend if it meaningfully improves outcomes.

Investor‑readiness tip: If you expect to move from SAFEs/notes to a priced round soon, start drafting your term‑sheet priorities now (valuation range, option pool size, board seat expectations, liquidation preference). See: Mastering Venture Capital Deals: A Startup Founder’s Guide.

Next Steps: Protect Your Shares

SAFEs and convertible debt can be a smart bridge if you know exactly where they will land your company. With the above resources, you can map financing and conversion scenarios, weigh options and prevent avoidable dilution.

Still unsure about SAFEs, convertible debt or which round best fits your startup’s capital needs? Your questions also help other entrepreneurs. Tell us what you’re modeling, and we’ll direct you to the correct assumptions.

CCG educational content: This blog content is for general information only and not legal, tax, or investment advice, does not create an attorney-client relationship and may be incomplete or outdated for your situation. Laws and guidance are subject to change; consult qualified counsel in your jurisdiction.

Clients Also Ask Us:

How do I calculate dilution from multiple SAFEs with different caps/discounts?

List each SAFE’s cap/discount, compute each one’s conversion price (lower of discounted price or price implied by the cap), convert dollars to shares, then total the shares and recompute ownership on a fully diluted basis. Your model should do this automatically.

What’s a fair discount for a SAFE or note?

Market ranges vary, but founders often see 10%–25% discounts and caps that reflect today’s risk. Use your model to test founder-friendly versus investor-friendly cases before committing.

Do MFN (most‑favored‑nation) clauses cause problems?

They can. A late SAFE with unusually low cap/extra rights can retroactively improve earlier investors’ terms via MFN, increasing dilution and limiting flexibility at the next round.

How big should my option pool be before a priced round?

Size it to near-term hiring, not a multi-year plan. Over-sizing the pool right before a round pushes more dilution onto founders at the worst possible time.

When does a convertible note’s interest matter?

At conversion. Accrued interest adds to the principal, increasing the dollar amount converted and therefore the number of shares issued.