A company at the pre-seed stage has a product, a plan and no sensible way to price a share. An investor who wants to back it anyway needs an instrument that takes the money now and settles the price later, at the first round where somebody does the work of pricing one. Three instruments do that job in the markets most candidates will meet: the SAFE in the United States, the convertible note almost everywhere, and the advance subscription agreement in the United Kingdom. They rhyme, and the differences between them are exactly what an interview asks about.
The problem every one of them solves
A priced round needs a valuation, a share class, a set of preferred rights and legal documents, all of which cost time and money that a company raising $400,000 from three angels cannot justify. So the early money is taken on a promise: pay now, receive shares at the next priced round, at a price set by terms agreed today. The two terms that set the price are the valuation cap and the discount, and every instrument in this guide is built from them.
A cap is the highest valuation the instrument will convert at; if the round prices above it, the early investor converts as though the round had been at the cap and gets more shares per dollar than the new money. A discount is a percentage off the round price, whatever the valuation. Where an instrument has both, it converts at whichever gives the lower price, so the discount is a floor and the cap is the upside.
The SAFE
The simple agreement for future equity was published by Y Combinator in December 2013 and rewritten in September 2018 so that its cap is a post-money figure. It is not debt: no interest accrues, there is no maturity date, and the money is not repayable. At the next priced round it converts into a shadow series of that round’s preferred stock. The current templates are cap only, discount only, and neither with a most favoured nation clause that lets the holder adopt any better terms the company later gives someone else.
The post-money cap is the part worth being able to do in your head. A $500,000 SAFE at a $5,000,000 post-money cap owns $500,000 ÷ $5,000,000 = 10% of the company’s capitalisation immediately before the priced round, counting every share, option and converting instrument but not the new money and not the round’s pool increase. On a table of 8,000,000 founder shares that is 888,889 shares. The stake is then diluted by the round’s pool top-up and the new money exactly as the founders are, so 10% before the round becomes about 7% after a round that takes 20% and tops the pool up to 10%.
Because each post-money SAFE fixes its own fraction, a second SAFE dilutes the founders and not the first SAFE. That was the point of the 2018 rewrite, and it is the trap in it: founders who sign six SAFEs "at a $10m cap" and have not added up the fractions can find they have promised a third of the company before anyone has priced a share. The cap table guide and the lab both walk this through.
If the company is sold before a priced round, the SAFE pays the greater of the money back and the cap fraction of the proceeds, which makes it behave like a 1x non-participating preferred share at the exit. If the company is wound up, the money comes back if any remains after creditors, alongside other SAFEs and any preferred stock. A pro rata right in the next round is not in the standard form and comes by a separate side letter.
The convertible note
The older instrument, and still the default in most of the world and for bridge rounds by existing investors in the United States. It is a loan: a principal amount, an interest rate of typically 2 to 8%, a maturity date of usually 12 to 24 months, and a conversion mechanic triggered by a qualified financing, meaning a priced round above a stated size. At conversion the principal plus accrued interest converts at the lower of the discounted round price and the cap price.
Worked. A $500,000 note at 6% outstanding for a year carries $530,000 into the round. The round prices at $1.50 a share. With a 20% discount the note converts at $1.20 and receives 441,667 shares. If a $5m cap implies a price of $1.00, the cap wins and the note receives 530,000 shares. The extra 88,333 shares are what lending at the point of highest risk was worth.
The differences from a SAFE all follow from its being debt. Interest accrues and converts too. At maturity without a round, the note is due, and the holder can extend, convert at the cap, or in principle call it, which usually means the company was finished anyway. At a sale before conversion, the note is paid as debt ahead of every share class, or converts at the cap and takes the fraction if that pays more. A stack of notes maturing before a round can force one at a bad moment, which a stack of SAFEs cannot.
| SAFE (post-money, 2018) | Convertible note | |
|---|---|---|
| Legal nature | A contract for future shares; not debt | A loan that converts |
| Interest | None | Typically 2 to 8%, converts with the principal |
| Maturity | None; waits for a round | Usually 12 to 24 months; then due, extended or converted |
| Conversion price | Lower of cap price and discounted round price | Lower of cap price and discounted round price |
| Cap basis | Post-money: ownership fixed at amount over cap | Usually pre-money, so notes dilute each other |
| Sale before conversion | Greater of money back and cap fraction | Principal plus interest as debt, or convert at cap |
| Wind-up | Money back after creditors, alongside preferred | Paid as a creditor, ahead of all shares |
| Where it is standard | US pre-seed and seed | Bridge rounds; most markets outside the US |
The advance subscription agreement, and why the UK is different
A British angel investing in a company that qualifies for SEIS gets 50% of the investment back as income tax relief; under EIS, 30%. That relief is the reason most first cheques into UK startups come from individuals, and it comes with conditions that a US-form SAFE does not meet. The shares must be full-risk ordinary shares; the money must not be refundable; no interest may accrue; and HMRC’s guidance for an advance payment requires that the agreement cannot be varied or assigned and that the shares are issued within six months.
The advance subscription agreement is the SAFE redrafted to pass those tests. The investor pays now for shares issued at the next round at a discount or under a cap, with a fallback valuation if no round happens by a longstop of at most six months. There is no refund at a sale, no interest and no maturity in the debt sense. It is a short bridge to a round the founders genuinely expect to close, not a way of deferring a valuation for two years, and the fallback valuation is negotiated hard because it is what the investor receives if the round does not come.
Convertible loan notes are used in the UK as well, but they are debt and do not qualify for SEIS or EIS at all, so they tend to appear in bridge rounds from existing institutional investors rather than in angel rounds.
The rest of the world
Most venture markets have either adapted the SAFE or kept a convertible loan, and the choice is usually about what local company law and tax practice will carry rather than about economics.
| Market | Instrument | Why it looks the way it does |
|---|---|---|
| United States | SAFE; convertible notes for bridges | Delaware corporate law makes a bare promise of future shares workable |
| United Kingdom | Advance subscription agreement | Drafted to keep SEIS and EIS relief: no refund, no interest, six-month longstop |
| France | BSA-AIR | A 2013 translation of the SAFE built on a share warrant, which French law recognises |
| Germany, Netherlands | Convertible loan (Wandeldarlehen) | Issuing shares needs a notary; a loan does not, so the debt form survives |
| India | iSAFE, compulsorily convertible debentures and preference shares | Indian company law recognises convertible securities, not bare promises |
| Singapore | CARE | A local adaptation of the SAFE |
| Brazil | Mútuo conversível | A convertible loan, for the same procedural reasons as Germany |
| Canada, Australia | SAFEs adapted to local law | By the leading startup law firms and accelerators |
Choosing between them
From the founder’s side a SAFE is cheaper, faster and carries no maturity, and a post-money cap is a fraction the founder can add up. From the investor’s side a note carries interest and a date, which is leverage if the company stalls, and a pre-money cap that dilutes with the other notes rather than fixing a fraction. Sophisticated angels in the United States have largely accepted the SAFE; institutional bridge investors still often prefer a note.
In the UK the question is usually decided by the tax relief. If the investors are claiming SEIS or EIS, the instrument is an ASA. If they are not, because they are a fund or a corporate, a convertible loan note or a priced round is more common.
What to check in the document
The economics live in five places, and a candidate reading one of these in an interview should go to them in order.
- The cap, and whether it is pre-money or post-money. The same number means different fractions
- The discount, and whether the instrument converts at the lower price or at both
- For a note: the rate, the maturity, and what happens at maturity without a round
- For a SAFE: whether there is a pro rata side letter, and whether there is a most favoured nation clause
- For an ASA: the longstop date, the fallback valuation, and that nothing in it can be varied or refunded
- What the instrument pays at a sale before conversion, because that is the exit waterfall’s question and the answer differs by instrument
Frequently asked questions
What is the difference between a SAFE and a convertible note?
A SAFE is a contract for future shares and is not debt: no interest, no maturity, no repayment. A convertible note is a loan that converts: it accrues interest, has a maturity date of usually 12 to 24 months, and ranks as a creditor ahead of every share class if the company fails. Both convert at the next priced round at the lower of a cap price and a discounted round price. The SAFE is standard for US pre-seed money; the note is common for bridge rounds and outside the United States.
What is the UK equivalent of a SAFE?
The advance subscription agreement (ASA). It does the same job, an advance payment for shares issued at the next round at a discount or under a cap, but is drafted to satisfy HMRC’s conditions for SEIS and EIS relief: the money cannot be refunded, earns no interest, the agreement cannot be varied, and the shares must be issued within six months. A US-form SAFE fails those conditions and would cost a British angel the relief.
How does a post-money SAFE convert?
Its holder’s ownership is fixed at the amount invested divided by the valuation cap, measured on the company’s capitalisation immediately before the priced round (all shares, options and converting instruments, excluding the new money and the round’s pool increase). A $500,000 SAFE at a $5,000,000 cap converts into 10% of that capitalisation, unless the round prices below the cap, in which case it converts at the round price less any discount. The stake is then diluted by the pool top-up and the new money like every other existing holder.
What happens to a convertible note at maturity if there is no round?
The note is due. In practice the holder extends it, converts it at the cap into shares at a valuation written into the note, or occasionally calls it, which generally means the company has failed. That leverage at maturity is the main practical difference between a note and a SAFE, which has no maturity and simply waits for a round.
Now try it
Cap Table Builder
Take a company from founding through a SAFE and a priced seed round. Set the cap, the pre-money and the option pool, watch the price per share and every holder’s stake move, then check your own arithmetic against the table.
Related guides
Want this applied to your recruiting?
Reading is the easy part. For practitioner feedback tailored to your situation, work 1:1 with Suro.