SAFEs and Convertible Notes for Seed Rounds

Why Seed Rounds Use SAFEs and Notes

Pricing an early-stage company is difficult, so many seed rounds use instruments that defer valuation to a later, priced financing round. SAFEs and convertible notes are the two most common tools for this purpose, each with distinct legal and economic characteristics.

How SAFEs Work

A SAFE gives an investor the right to receive equity in the future, typically when the company raises a priced round or experiences another triggering event such as an acquisition. A SAFE is not debt — it does not accrue interest and has no maturity date requiring repayment.

How Convertible Notes Work

A convertible note is structured as debt that converts into equity, generally at a discount or subject to a valuation cap, when a triggering event occurs. Unlike a SAFE, a note typically accrues interest and carries a maturity date, which the company and investors must address if no triggering event has occurred by that date.

Valuation Caps and Discounts

Both instruments commonly include a valuation cap, a discount rate, or both, to compensate early investors for taking on risk before the company's valuation is established by a priced round. Negotiating these terms has significant implications for future dilution.

Stacking Multiple Instruments

Companies that raise multiple SAFEs or notes over time need to carefully track how each instrument will convert, since differing caps, discounts, and terms across instruments can create complex — and sometimes unexpected — dilution outcomes at the priced round.

Choosing the Right Instrument

Whether a SAFE or a convertible note is the better fit depends on investor preference, the company's runway, and how the founders want to manage future dilution and repayment risk. Anthony Girand Law helps founders evaluate these tradeoffs before terms are finalized.

Working With Anthony Girand, Esq.

Anthony Girand, Esq. is a JD/MBA and Maryland attorney whose practice includes immigration, tax controversy, federal litigation, startup law, and regulatory compliance. He brings a business-minded legal perspective to matters involving federal agencies, founders, professionals, companies, and individuals facing consequential legal decisions.

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