Should I Raise a SAFE, Convertible Note, or Priced Equity Round?
- Stephanie Pflaum
- Sep 4
- 6 min read
Updated: Sep 12
Though many SaaS entrepreneurs today choose to bootstrap and delay equity dilution as long as possible, it’s never a bad idea to understand your funding options and think about strategies, so you can move quickly when the time is right.
Convertible notes and their cousin, the SAFE (simple agreements for future equity), have become popular alternatives to priced equity rounds over the last decade or so. SaaS founders like them because they’re fast and they defer the valuation conversation until the company has traction. Convertibles are also more founder-friendly, providing flexibility to grow without giving away too much ownership or control of the business early on, thus minimizing dilution.
We field a lot of questions from SaaS founders about raising convertible rounds and priced equity rounds in their early stages. We’re here to help answer the frequently asked question:
Should I raise a SAFE, convertible note, or priced equity round?
Each of these fundraising options has its place—what’s right for you depends on your startup’s stage, your goals, and your investors.
This quick primer will help you:
Make informed decisions about what type of funding is best for you and your startup,
Evaluate potential risks, and;
Negotiate timing.
First, let’s zoom out and look at how a convertible note (a.k.a. convertible debt) compares to a SAFE. Both solve the same problem—raising early money without haggling over valuation—but they do it in different ways. After that we'll look at priced equity rounds.
1. Should my startup raise a SAFE or a convertible note?
Convertible notes and SAFEs are both options for raising startup capital quickly and deferring valuation until a later round. The key difference is that notes are debt with interest and a maturity date, while SAFEs are simpler agreements with no interest or repayment risk. There are tradeoffs with each, so let’s break down the key features and differences.
Convertible Notes vs. SAFEs
Feature | CONVERTIBLE NOTES | SAFEs |
Legal Structure | Debt instrument (loan) | Contract for future equity (not debt) |
Interest | Accrues interest (typically 4–8%) | None |
Maturity Date | Yes (12–24 months common) | None |
Repayment Obligation | Possible (if no conversion, investors can demand repayment) | None |
Conversion Trigger | Next qualified financing round (e.g., Series A) | Next qualified financing round (e.g., Series A) |
Investor Protections | More protective (debt status provides leverage) | Fewer protections (riskier for investors) |
Discount & Valuation Cap | Common, negotiated | Common, negotiated |
Founder Perspective | More pressure (repayment risk, ticking clock) | More flexibility, no looming maturity |
Investor Perspective | Safer fallback (can call debt if needed) | Higher risk, depends entirely on equity conversion |
What is a SAFE (Simple Agreements for Future Equity)?
A SAFE is a type of convertible that offers founders maximum speed and simplicity. Designed for very early stage startups (pre-seed or seed), founders can raise capital without a repayment obligation and delay equity dilution. SAFEs are sometimes referred to as convertible equity.
Inspired by Sequoia Capital’s startup financing instruments, SAFEs were imagined by Yokum Taku of Wilson Sonsini and Adeo Ressi of Founder Institute and TheFunded.
SAFE Core Terms
Valuation Cap: The maximum valuation at which the SAFE converts into equity. This ensures early investors get a favorable price if your next round is higher.
Discount Rate (optional): A 10 to 25% discount on the next round’s share price. Sometimes paired with a cap, sometimes not.
Conversion Trigger: The SAFE converts when you raise a qualified priced equity round (e.g., Seed, Series A).
No Interest / No Maturity: Unlike convertible notes, SAFEs don’t accrue interest or have a repayment date.
Angels and accelerators are familiar with SAFEs and often value the ease of making a deal without a valuation debate or financing debt. But there are plenty of early-stage investors and VCs that prefer notes or priced equity over SAFEs to protect their investments and lower their risk.
For added protection, SAFE investors may include additional terms in the funding deal, which can include:
Pro Rata Rights: Some SAFEs give investors the right to participate in future rounds to maintain ownership.
Liquidity Event Provisions: If you sell the company before a priced round, investors either get their money back (sometimes with a small premium) or convert into shares right before the sale.
In short: A SAFE is usually just a cap (sometimes with a discount) plus conversion mechanics, with optional extras like pro rata rights. Everything else that comes with debt (interest, maturity) is stripped out.
PROS | CONS |
|
|
Who’s it for?
Founders that want speedy capital, simplicity, and less stress (no fear of default).
What is a Convertible Note (Convertible Debt)?
A convertible note is like an IOU—investors give you upfront cash in the form of debt, which accrues interest, and has a maturity date. When you raise your next qualified equity round the debt converts into shares that investors can get at a discount. If there’s no conversion event before the maturity date, investors can ask for repayment or renegotiate the debt.
Convertible Note Core Terms
Valuation Cap: The maximum company valuation at which the note converts into equity.
Discount Rate: Usually 10 to 25%. Lets investors buy shares at a cheaper price than the next round’s investors.
Interest Rate: Typically 4 to 8% annually. This accrues and converts into equity, rather than being paid in cash.
Maturity Date: Commonly 12–24 months. At maturity, investors can technically demand repayment, though most prefer extension or conversion.
Conversions and Triggers
Qualified Financing: A priced equity round (Seed/Series A) of a certain size—often $1M+—that triggers automatic conversion.
Non-Qualified Financing: Smaller rounds that may convert at the investor’s option.
Liquidity Events: If the company is sold before conversion, notes typically convert into equity or pay out at 1 to 2x the principal.
Convertible notes are typically raised by early stage startups from investors who feel more comfortable with added structure and security. Because the debt is structured to provide short-term cash, convertible notes are best used as a bridge to the next funding round.
For added protection, convertible note investors may include additional terms in the funding deal such as pro rata rights. They will also include debt repayment terms, in case there’s no conversion by the note’s maturity.
In short: A convertible note is like a SAFE with a debt component. Think of it as a loan that turns into equity, plus a cap, discount, interest rate, and maturity date.
PROS | CONS |
|
|
Who’s it for?
Founders that want speedy capital and simplicity, but also want to sweeten the deal for investors that are more comfortable with added downside protection.
2. Should my startup raise a priced equity round?
Many startups start with SAFEs or convertible notes to get early capital in the door, then convert them all into equity at the first priced round. Think of it as the appetizer before your main course. Not all startups pursue venture funding—but if that’s your goal, here’s a brief rundown of priced equity rounds.
What is a Priced Equity Round?
A priced equity round is when a startup raises money by selling newly issued shares at an agreed valuation. Unlike SAFEs or convertible notes, where the valuation is postponed, a priced round requires setting the company’s worth upfront—for example raising $5M at a $20M pre-money valuation.
If you’ve got strong traction, revenue, and you need a larger amount of capital to scale, then it’s time to explore raising your Series A and getting institutional investors on board. Just make sure your cap table is clean!
PROS | CONS |
|
|
TL;DR:
SAFEs = promise of equity later, no loan involved. No interest + no maturity.
Convertible Notes = loan that later turns into equity. Has interest + maturity.
Priced equity = ready to scale and set company valuation. Series A and beyond.
