Founder explainer
SAFE vs convertible note: how they work and which to use
SAFEs and convertible notes let a startup raise money now and set the share price later, usually at the next priced round. Both convert into shares, but a convertible note is a loan and a SAFE is not.
Convertible notes
A convertible note is debt that converts into equity. It carries an interest rate, which adds to the amount that converts, and a maturity date by which it should convert or be repaid. It usually converts at a discount to the next round's price, a valuation cap, or whichever gives the investor the better price.
Example: a ₹50 lakh note with a 20% discount and a ₹6 crore cap. The next round is priced at a ₹10 crore pre-money valuation. The cap gives a price 40% below the round's (6 ÷ 10), better than the 20% discount, so the note converts at the cap, along with any interest that has built up.
SAFEs
A SAFE (simple agreement for future equity) was introduced by Y Combinator in 2013 as a simpler alternative. It has no interest and no maturity date: it is a right to shares at the next priced round, normally on a valuation cap and sometimes a discount. Since 2018 the standard version is the post-money SAFE, whose cap fixes the investor's percentage before the next round's money: ₹50 lakh at a ₹5 crore post-money cap converts to 10%.
Side by side
| Convertible note | SAFE | |
|---|---|---|
| Legal form | Debt | Contract for future equity |
| Interest | Yes | No |
| Maturity date | Yes | No |
| Valuation cap / discount | Usually both | Usually a cap, sometimes a discount |
| Paperwork | More | Less |
In India
US-style SAFEs do not fit neatly into Indian company and foreign-exchange law, so Indian early rounds usually use compulsorily convertible preference shares (CCPS), convertible notes, which DPIIT-recognised startups may issue under specific rules, or market templates such as the iSAFE, which is structured as CCPS. Get legal advice on which suits your investors, especially foreign ones.
What happens at conversion
When the next priced round closes, each SAFE or note converts into the same class of shares the new investors buy, at the better of its cap or discount price. Because a post-money SAFE fixes the investor's percentage before the new money, the dilution from all SAFEs falls on the existing holders, chiefly the founders. Notes also convert their accumulated interest. The round's lawyers will produce a conversion schedule; founders should check it against their own model.
Common mistakes
- Issuing several SAFEs at rising caps without totting up how much of the company they will take together.
- Assuming SAFEs are free money: they convert, and the dilution can surprise founders at Series A.
- Letting convertible notes reach maturity without a plan, which hands noteholders leverage.
- Using US templates for Indian investors without checking that they work under Indian law.
Frequently asked questions
- Is a SAFE better than a convertible note?
- SAFEs are simpler and have no repayment risk for founders, so they are popular for early rounds. Notes can suit investors who want the protections of debt.
- When do SAFEs and notes convert?
- Usually at the next priced equity round, at the cap or discount price. Terms also cover what happens if the company is sold first.
- What is a valuation cap?
- The highest valuation at which a SAFE or note converts. If the next round is priced above the cap, the investor converts as if the valuation were the cap, so they get more shares.
Keep learning
Pre-money vs post-money valuation, with examples
Pre-money is what a startup is worth before new investment; post-money adds the new money. How to calculate both, investors' ownership and the option pool effect.
What is pre-seed funding? Sources, size and what investors want
Pre-seed funding is a startup's first outside money. Where it comes from in India and elsewhere, how it is usually structured, and what early investors look for.
Startup funding stages: pre-seed to Series C, explained
What each startup funding stage pays for, what investors expect at each step, and how big rounds are in practice, from StartupReader's own funding data.
Startup dilution calculator
See how much founders own after each round, including option pool top-ups.
Official-source guides: How to get 100% tax exemption under Section 80-IAC · How to get DPIIT startup recognition in India
Written by the StartupReader editorial desk with AI assistance, from standard definitions and the examples worked through above; updated 2026-10-22. Rules on tax and foreign investment change, so check the official sources or an adviser before acting. Spotted something wrong? Tell us.