SAFE vs Convertible Note
A SAFE (Simple Agreement for Future Equity) and a convertible note both give investors the right to convert their investment into equity at a future priced round. The core difference: a convertible note is debt. It carries an interest rate, has a maturity date, and accrues interest that converts alongside the principal. A SAFE is not debt. There is no interest, no maturity, and no repayment obligation. Y Combinator introduced the SAFE in 2013 specifically to strip away the debt mechanics that made early-stage financing unnecessarily complex.
Valuation Cap vs Discount Rate
Both instruments typically include two conversion mechanisms: a valuation cap and a discount rate. The cap sets a maximum valuation at which the investment converts, regardless of how high the next round prices the company. The discount gives the investor a percentage reduction off the next round's price per share. At conversion, the investor gets whichever method produces a lower price per share, meaning more shares for the same investment.
For example, if the cap price works out to $0.80 per share and the discount price works out to $1.20 per share, the investor converts at $0.80 (via the cap). If the next round prices below the cap, the discount may produce the better deal.
When the Cap Wins vs When the Discount Wins
The cap is more valuable when the company's valuation increases significantly between the note/SAFE and the priced round. The higher the next round's pre-money valuation relative to the cap, the more the cap protects the investor. The discount matters more in smaller raises or when the next round's valuation lands close to or below the cap. In practice, early-stage companies with strong growth trajectories see the cap do most of the heavy lifting.
Accrued Interest on Convertible Notes
Convertible notes accrue simple interest over their term. This interest does not get paid out in cash. Instead, it adds to the principal amount that converts into equity. A $500,000 note at 5% annual interest held for 24 months accrues $50,000, meaning $550,000 converts into shares at the conversion price. This is one reason convertible notes produce slightly more dilution than an equivalent SAFE.
How This Calculator Works
discountPrice = (preMoney / sharesOutstanding) × (1 − discount/100)
conversionPrice = min(capPrice, discountPrice)
For convertible notes, accrued interest is calculated as simple interest: principal × rate × (term in months / 12). The total converting amount (principal + interest) is divided by the conversion price to determine shares received. Ownership percentage accounts for the new shares by dividing shares received by the sum of existing shares outstanding plus shares received.
For a broader view of how these conversions affect your cap table, see the Equity Dilution Calculator.
This calculator is for illustrative purposes only. Actual conversion mechanics are governed by the specific terms in your SAFE or convertible note agreement, including pro rata rights, MFN clauses, and qualified financing thresholds. Consult legal counsel for specific calculations.
