Convertible or SAFE structuring help

Both let investors put money in now and receive shares later, usually at the next priced round, often with a valuation cap or a discount. A convertible note is debt: it carries an interest rate and a maturity date, so in theory it has to be repaid or converted by a deadline. A SAFE is not debt, has no interest and no maturity date, which makes it simpler and more founder-friendly. SAFEs dominate early-stage rounds in the US, while notes are still common in some markets and with some investors.

The difference is how ownership is calculated when the SAFE converts. With a post-money SAFE, the valuation cap includes all SAFE money raised, so each investor can see exactly what percentage they will own, and founders absorb the dilution from every additional SAFE. With the older pre-money SAFE, SAFE holders dilute each other and founders a little less clearly. Y Combinator's post-money SAFE, introduced in 2018, is now the default in most US early-stage rounds, so model the conversion before you stack several of them.

Both reward early investors for taking risk before the price is set. A valuation cap sets the maximum valuation at which the SAFE converts, so if your next round is priced higher, the SAFE converts as if the price were the cap. A discount gives the SAFE holder a lower price than new investors pay, often 10 to 25 percent. When a SAFE has both, the investor usually gets whichever gives them more shares. An uncapped SAFE with only a discount or a most favored nation clause is more founder-friendly.

There is no fixed limit, but stacking SAFEs at different caps makes ownership hard to see until the priced round, when founders are often surprised by how much dilution has built up. Problems show up when total SAFE money grows large relative to the next round, when caps are far apart, or when some SAFEs carry side letters or pro rata rights. Keep a pro forma model of how every SAFE converts at a few plausible valuations, and share it with anyone advising you on the next raise.