Convertible Notes vs SAFEs: An Angel's Downside View

TL;DR: According to Almanac, citing the Angel Capital Association's 2020 Angel Funders Report, 37% of angel deals in 2019 used convertible notes, and SAFEs have gained ground since. If you write checks, you'll see both documents in the same month. I read them the same way every time, downside first. What do I own, what am I owed, and what happens if the next round never shows up?

This piece is for you if you already invest in startups and want to compare the two instruments from the investor's side of the table. The founder's view is covered elsewhere on this site.

What is the real difference between a convertible note and a SAFE?

A convertible note is debt and a SAFE is not. Almanac says a note is recorded as debt, accrues interest and carries a maturity date, three features that distinguish it from a SAFE. Those three features are where your downside protection, if you have any, comes from.

Both instruments can still carry a valuation cap. Securities.io walks through a SAFE with a $9 million post-money cap, so a cap alone doesn't tell you which document you're holding.

Term	Convertible note	SAFE
Legal nature	Debt that converts to equity	Contract for future equity, not debt
Interest	Typically 4–8% a year, converting into extra equity	None
Maturity date	Usually 12–24 months	None
Cap and discount	Both common	Cap common
Your status before conversion	Creditor	Holder of a future-equity right

The interest and maturity figures come from Almanac. The row on your status before conversion is my reading of the debt-versus-contract difference.

How do the cap and the discount decide what you own?

The cap sets the highest valuation your money converts at. The discount takes a percentage off the new investors' price. At conversion you generally get whichever is lower, so you rarely benefit from both.

Almanac gives a clean example. With a $5M cap and a Series A at a $10M pre-money valuation, the noteholder converts as if the company were worth $5M and receives roughly twice the shares the Series A investors get for the same dollars.

VC Beast runs a fuller case for a $250K angel check.

Input	Value
Note size	$250K
Valuation cap	$5M
Interest	6%, 24-month maturity
Discount	20%
Series A pre-money	$10M
Discount route	$10M × 80% = $8M effective valuation
Result	The $5M cap wins, and $30K of accrued interest also converts

In that example the discount never mattered. The cap did all the work, which is why I look at the cap first and treat the discount as a floor for the case where the company is valued modestly. You can see how accrued interest changes the share count in our convertible note guide for angels.

What happens if no priced round ever comes?

On a note, the maturity date arrives. Almanac describes it as a deadline by which the company must either raise a qualified financing round or negotiate with noteholders. You hold a creditor's claim at that point, and a claim is something you can negotiate with.

That claim has limits. Montague Law notes that debt gives investors higher priority than equity holders if the company fails. It also warns that if the company fails to meet the conversion conditions or goes bankrupt, investors risk losing their entire investment in principal and interest. A startup that couldn't raise a round usually can't repay you either, so I treat the maturity date as leverage for an extension or a conversion deal, not as a repayment plan.

On a SAFE there is no maturity date, so nothing comes due and nothing forces a conversation. You can wait indefinitely for a priced round, a sale or a wind-down. That can be fine if you trust the founder and the runway. It does mean you have no scheduled moment to ask where things stand.

Which should you prefer as an angel?

It depends on the company, and I can't tell you which one to sign. The market has a default, though. Causo Hub puts it this way: post-money SAFE for US Delaware C-corps raising under about $3M from sophisticated angels and institutional seed funds, convertible note for everything else.

So on a small round for a US C-corp, expect a SAFE and focus your attention on the cap. On a larger round, a non-US entity or a lender-style deal, expect a note and focus on the maturity terms. Our investor's comparison of SAFEs and notes goes through more cases, and the SAFE explainer covers the instrument itself.

Common mistakes

The most common one is comparing the discount and ignoring the cap. If the cap beats the discount, as in the example above, the discount is decoration.

The second is treating a note's interest as income. It accrues and converts into more shares, and per Almanac it isn't paid in cash. If the company never converts, it becomes part of what you're owed from a company that may not have the money.

The third is assuming the maturity date protects you. It gives you a date to negotiate from. It doesn't put cash in the company.

The fourth is signing a SAFE without asking what the founder expects to happen if a priced round takes much longer than planned. Because the SAFE has no deadline, that answer is the only timeline you get.

FAQ

Is a convertible note better than a SAFE for an investor? A note gives you interest, a maturity date and a creditor's position. A SAFE gives you none of these. That's more protection on paper. Whether it helps depends on the company's cash, since a startup that can't raise may not be able to repay.

What happens to a convertible note if the startup never raises a priced round? The note reaches its maturity date, usually 12 to 24 months out. The company must then convert, extend or negotiate with noteholders. You're a creditor at that point, but repayment depends on what the company actually has.

Does the interest on a convertible note get paid in cash? Usually not. The interest typically accrues and converts into additional equity alongside the principal. In the $250K example above, $30K of interest converted into shares rather than being paid out.

Do SAFEs have a cap and a discount too? SAFEs commonly carry a valuation cap, such as the $9 million post-money cap in the Securities.io example. Unlike a note, a SAFE has no interest and no maturity date, so the cap carries most of the economics.

Before your next check, find the cap, the maturity date and the conversion trigger in the document, and write down what you would own and what you would be owed if no priced round arrived in 24 months.

Educational content only. Not investment, tax, or legal advice. Not an offer or solicitation to buy or sell securities. Past performance does not guarantee future results. Private-market investments are illiquid and involve risk of loss, including total loss of capital. Consult qualified advisers. Angel Investors Network is not a broker-dealer or investment adviser.