SAFE vs convertible note for seed round - which should we use?

Raising our seed round ($750K target). Have interest from 3 angels and 1 small fund. Everyone seems flexible on structure.

Our lawyer mentioned both SAFEs and convertible notes as options. I've read the Y Combinator guide on SAFEs but still confused about which makes more sense for us.

What are the actual pros/cons? And how do we think about valuation caps? We're pre-revenue but have a working product and 2K beta users.

We did a SAFE for our seed ($500K). Main advantage: super simple, no interest rate or maturity date to worry about. Converts when you do a priced round.

Our cap was $5M. Investors seemed totally fine with it. Whole thing took like 2 weeks from term sheet to close.

The key differences:

SAFE (Simple Agreement for Future Equity):

• Not debt - just a promise of future equity
• No interest rate, no maturity date
• Simpler paperwork, faster to close
• More founder-friendly because there's no deadline pressure
• YC standard docs are well-understood by investors

Convertible Note:

• Actual debt instrument - company owes the money
• Has interest rate (typically 2-8%) and maturity date (usually 18-24 months)
• If you don't raise a priced round by maturity, investors can demand repayment (though most extend)
• More traditional - some older investors prefer it

Angel investor here. I've done both. Honestly prefer SAFEs at this stage - they're cleaner and I don't have to track accruing interest.

For your valuation cap: at $750K raise with 2K users and working product, I'd expect to see a $4M-$7M cap depending on your market and traction trajectory. Pre-revenue is fine if growth metrics are strong.

One thing to watch: make sure all investors are on the SAME terms. Don't give one investor a $4M cap and another a $6M cap or you'll have a mess at conversion.

Thanks @DianaM_Counsel. So if we do a SAFE and never raise a Series A, what happens? Does the SAFE just... sit there forever?

Good question. The standard YC SAFE has conversion triggers for:

• Equity financing (priced round above a threshold, usually $1M)
• Liquidity event (acquisition, IPO)
• Dissolution event (company winds down)

If you become profitable and never raise again, technically the SAFE holders just wait until there's a liquidity event. In practice, many companies in that situation will do a small priced round just to convert the SAFEs and clean up the cap table.

This is actually an argument FOR SAFEs from the founder perspective - no maturity date means no forced timeline.

We did convertible notes for our seed and honestly regret it. Hit the 18-month maturity during COVID and our Series A got delayed. Had to go back to all our note holders and ask for extensions. Super awkward and stressful.

If I could do it over, would've done SAFEs. The maturity date added zero value and created a ticking clock we didn't need.

Adding to what @DianaM_Counsel said about valuation caps - this is the most important economic term in your SAFE.

Quick example: If you set a $5M cap and raise your Series A at a $20M pre-money valuation, your SAFE holders convert as if the company was worth $5M. So they get 4x more equity than Series A investors for the same dollar amount invested.

The math: $100K investment at $5M cap = 2% ownership. Same $100K at $20M valuation = 0.5% ownership.

This is the reward for early risk. Cap should reflect your current stage - too low and you're giving away too much, too high and investors won't bite.

This is super helpful. So sounds like SAFE is the move. For cap, thinking $5.5M based on what @KevinC_Ventures suggested and our market.

One investor mentioned wanting a discount rate in addition to the cap. Is that normal? I thought SAFEs were cap OR discount, not both.

You can have both cap AND discount - the SAFE will convert at whichever gives the investor more equity (better deal for them).

Typical discount is 15-20%. So if your Series A is at $20M valuation with a 20% discount, SAFE holders convert at $16M effective valuation.

But if you have BOTH a $5.5M cap and 20% discount, they get the better of: (1) $5.5M cap, or (2) Series A price with 20% discount. In this example the cap is way better so that's what they'd use.

Many SAFEs these days are cap-only, no discount. Simpler math and cleaner for everyone. The discount really only matters if your Series A ends up below the cap.

Perfect. Going with SAFE, $5.5M cap, no discount. Talked to our investors and they're all good with it. Using the YC post-money SAFE template.

Thanks everyone for the education - this thread was way more helpful than the 10 blog posts I read.