What Are Convertible Notes and SAFEs?
Both are instruments that let investors put money in now and convert that money into equity at the next priced round — without anyone having to agree on a valuation today. The investor gets a discount or a price cap as compensation for taking the risk early.
A convertible note is legally debt: it has an interest rate (typically 4–8%) and a maturity date (typically 18–24 months). If conversion does not happen by maturity, the holder can technically demand repayment — which almost never happens in practice but matters legally.
A SAFE (Simple Agreement for Future Equity) is not debt. It has no interest, no maturity, and no repayment right. It is a contractual right to receive equity at a future event. Created by Y Combinator in 2013 and now standard in the US and increasingly in the UK; less common in continental Europe where the CLA (Convertible Loan Agreement) remains dominant for legal reasons. See [convertible loan agreement](/captable/convertible-loan-agreement) for the EU-specific variant.
How Conversion Works
At the qualified financing round (usually defined as a priced round above a minimum size — e.g. €1M), the note or SAFE converts into shares of the new preferred class. The number of shares is determined by the conversion price, which is the LOWER of two values:
The cap price: the investment amount divided by (the valuation cap divided by the total fully diluted shares before the new round). This kicks in if the new round is at a higher valuation than the cap.
The discount price: the new round's price per share, minus the agreed discount (typically 15–25%). This kicks in if the new round is at or below the cap.
The investor gets the better of the two — meaning more shares than someone paying the new round price.
Multiple SAFEs or notes from different investors with different caps and discounts all convert simultaneously at the same priced round. Each is calculated independently using its own terms. This compounds dilution quickly when there are many small early checks.
Key Terms and Definitions
Valuation cap — the maximum pre-money valuation at which the note or SAFE will convert. Acts as a price ceiling for the investor. Lower cap = more shares for the early investor at conversion.
Discount — the percentage reduction off the new round's price-per-share at conversion. Typical range: 15–25%. The investor's "thank you" for being early.
MFN (Most Favored Nation) clause — if you issue another SAFE or note with better terms (lower cap or higher discount), the holder of the MFN SAFE can elect to take those better terms. Standard in SAFEs; rare in notes.
Qualified financing — the minimum round size that triggers automatic conversion. Typically €1–2M priced round. Below this, the note may convert at the holder's option or roll into the next round.
Pro-rata rights — the right to maintain ownership percentage by participating in future rounds. Often granted to SAFE holders as a side letter. See [pro-rata rights](/captable/pro-rata-rights).
Pre-money vs. post-money SAFE — the original YC SAFE was pre-money (cap is pre-money). The 2018 post-money SAFE made the cap a post-money value, which is meaningfully more dilutive to founders because new SAFEs do not dilute existing SAFE holders. Always confirm which version you are signing.
Why Convertible Notes and SAFEs Matter for Founders
The convenience is real: a SAFE closing takes a week and a few thousand euros of legal cost, versus a priced round that takes 8 weeks and €30K+. For pre-seed cheques of €50–250K, this is a rational trade. But every SAFE you sign is a future dilution liability, and the cumulative effect is often larger than founders model.
The most common mistake is signing many small SAFEs at low caps. Five investors at €100K each on a €3M cap looks fine individually. At a €10M Series A, all five convert at €0.30/share while the new investor pays €1.00/share — and the founders eat the entire dilution gap. Doing a single priced seed round at €4M post would have been less dilutive than the stack of SAFEs.
Practical guidance: keep a running model of how every outstanding SAFE will convert at your projected next round. If the math shows founders dropping below 50% combined before Series A even starts, you have signed too many SAFEs at caps that are too low. Consider doing a priced seed round to clean up the stack before the next instrument.
Also check the SAFE version. A post-money SAFE allocates dilution from later SAFEs to founders only — meaning your team eats the dilution of every future SAFE the company signs. The pre-money SAFE spreads it across all existing SAFE holders. The difference can be several percentage points of founder ownership over a typical pre-seed-to-Series-A journey.
Common Scenarios
Single SAFE, generous cap, clean Series A: €1M SAFE at €8M cap converts at a €15M Series A. SAFE holder owns ~12.5% post-conversion. New investor takes 20% for €4M. Founders are diluted to ~55%. Clean, simple, predictable.
Stack of small SAFEs at varying caps: €500K total across 8 investors with caps ranging €3M–€6M. At €10M Series A, the average effective price-per-share is much lower than the new investor pays. Founders are diluted more than the headline 20% Series A would suggest.
SAFE that never converts: company stalls, never raises a qualified round. SAFE sits indefinitely (with no maturity date) and is messy to resolve. Either the company eventually does a priced round (forcing conversion at whatever cap was negotiated years ago) or negotiates a conversion at a mutually agreed value.
Note hitting maturity: company has not raised in 24 months. Holder can technically demand repayment. In practice, an extension is negotiated, often with improved terms for the noteholder (higher discount, lower cap, additional pro-rata rights).
How CAPLINK Helps You Manage Convertible Instruments
CAPLINK's cap table module tracks every outstanding SAFE and note: principal, cap, discount, MFN status, pro-rata side letter, accrual of interest (for notes), and projected conversion at any modeled future round. When you input a hypothetical Series A at €X pre-money, the scenario engine converts every instrument using its own terms and shows you the resulting fully diluted cap table — so you know exactly how much founder ownership you have left before you walk into the next term-sheet conversation.
This is the single most useful function for founders who have raised on instruments. You can see at a glance whether your SAFE stack is sustainable into the next round, whether you should renegotiate a cap before raising, and how a flat-vs-up round affects each instrument differently.
See [pre-money vs. post-money valuation](/captable/pre-money-post-money-valuation) for the underlying valuation math, [bridge rounds](/captable/bridge-rounds) for between-round financing using these instruments, [anti-dilution](/captable/anti-dilution) for how converted SAFEs interact with down-round protections, and the [European CLA guide](/captable/convertible-loan-agreement) for the legal wrapper used in DACH.