If you are raising your first round of outside capital for a San Diego startup, you will almost certainly be asked whether you are raising on a SAFE or a convertible note. Both let you take investor money now and convert it into equity later, without setting a company valuation today. They work differently, though, and choosing the wrong one can cost you meaningful equity or create unexpected problems later.
What Is a SAFE?
A SAFE (Simple Agreement for Future Equity) was developed by Y Combinator in 2013 and has become the dominant instrument for pre-seed and seed fundraising. As of 2025, roughly 85 to 90 percent of pre-seed deals use SAFEs. The document is short, typically one to five pages, and the deal is straightforward: an investor gives you money now in exchange for the right to receive equity at a future priced round, acquisition, or IPO.
Key characteristics of a SAFE:
- No interest rate. A SAFE is not debt, so it does not accrue interest.
- No maturity date. There is no deadline by which you must repay or convert. The SAFE sits on your cap table until a triggering event occurs.
- Converts at the next priced round (typically your seed or Series A) at a discount or valuation cap relative to the new investors.
- Founder-friendly. No debt on your balance sheet and no repayment obligation if the company never raises another round.
What Is a Convertible Note?
A convertible note is a loan that converts into equity under specified conditions. It carries an interest rate (typically 5 to 8 percent), a maturity date (usually 18 to 24 months), and converts into equity at a discount or valuation cap when the company closes a qualified financing round.
Because it is structured as debt, a convertible note creates a real obligation. If the company hits maturity without a conversion event, the investor can demand repayment. In practice this is usually renegotiated, but the legal obligation exists. Convertible notes also require annual Form 1099 filings to report accrued interest to investors.
The Core Trade-Offs
| Feature | SAFE | Convertible Note |
|---|---|---|
| Legal structure | Equity warrant | Debt (loan) |
| Interest | None | 5 to 8 percent annually |
| Maturity / repayment risk | None | Yes, due at maturity |
| Complexity | 1 to 5 pages | 10+ pages |
| Time to close | 1 to 2 weeks | 2 to 4 weeks |
| Balance sheet treatment | Not a liability | Liability |
For most early-stage San Diego founders raising from angels, a SAFE is simpler, faster, and cleaner. Convertible notes still show up when investors specifically request them, or when the round is bridging between priced rounds and lender-style protections make sense.
Valuation Cap and Discount: The Terms That Matter Most
Whichever instrument you use, two economic terms drive how much equity your early investors ultimately receive.
A valuation cap sets the maximum company valuation at which the investor’s money converts into equity. If the cap is $5 million and you raise your Series A at a $15 million valuation, the SAFE investor converts as if the company were valued at $5 million, which gives them significantly more shares than the new investors paying the same price.
A discount gives the investor shares at a reduced price (typically 10 to 25 percent below the price new investors pay at the next round).
Some instruments include both, and the investor typically gets whichever produces the better conversion price. Negotiating these terms, especially the valuation cap on an early SAFE or note, is where founders most often make expensive mistakes.
Why Legal Review Matters
SAFEs are short, but they are not legally simple. Post-money SAFEs, pre-money SAFEs, pro rata rights, side letters, and most-favored-nation clauses all have material effects on your cap table and on your future fundraising flexibility. Taking $500,000 from three investors on SAFEs with overly investor-friendly terms can complicate your Series A negotiation in ways that are not obvious until you are in the middle of one.
Before you issue any SAFE or convertible note, have an attorney who understands California startup financing review the terms and confirm the instrument fits your cap table and long-term fundraising plans. The cost of that review is trivial compared to the equity at stake.
Bayside Counsel advises San Diego founders and early-stage companies on financing structures, equity agreements, and startup legal matters. Contact us before you take your first check.