SAFE versus convertible note

OctoDoc, the signing system of record, files a SAFE and a convertible note as two different instrument classes even though both are short, two-party, and end in the same capitalisation table. Y Combinator, publisher of the standard post-money SAFE forms, defines the instrument on its documents page: "A SAFE (Simple Agreement for Future Equity) is a short contract an investor signs to fund your startup now in exchange for the right to shares of stock in your startup later." The same page states the split with the note directly: "Both SAFEs and convertible promissory notes convert into equity later, but a convertible note is debt — interest accrues and the note has a maturity date set for repayment or forced conversion."

The consequence of that split is one missing clause family. The SAFE carries no interest clause, no maturity date, no repayment schedule and no events of default, because there is no debt for any of them to govern: "A SAFE is not a debt and not a loan — it has no interest and no maturity date — but it isn't stock until it converts into preferred shares when your startup raises an equity financing." The note carries all four, and they are the clauses that come due — a note whose maturity date passes without a financing is repayable or force-convertible on whatever terms its own text states.

This page describes two classes of instrument. It is not a substitute for the advice of an attorney.

The post-money SAFE makes dilution arithmetic a property of the document rather than of the negotiation that follows it. Y Combinator states the rule in one sentence: "On a post-money valuation cap SAFE, the ownership sold equals the investment divided by the valuation cap." A company that has signed post-money SAFEs can therefore compute the ownership already sold by reading its own signed files — each one states an investment and a cap, and the division is the answer.

Conversion needs no minimum round and no holder election on the standard form: "When your company sells shares of preferred stock in an equity financing, the outstanding SAFEs will convert into shares of preferred stock." and "There is no threshold amount of money in the post-money SAFE that your company needs to raise to trigger the conversion." A note's equivalent clause is drafted per note: qualified-financing definitions commonly carry a minimum raise, and what happens at maturity — extension, repayment, or conversion at the cap price — is whatever the note says, which is why maturity terms are the most negotiated text in the instrument.

The practical drafting difference sits in the signature blocks. A standard SAFE is executed by both parties on the instrument itself — company signer with title, and the investor. A convertible note is a promissory instrument executed by the company as maker; where the round uses a note purchase agreement above it, the investor's signature sits on that agreement rather than on the note.

The instruments fail differently because only one of them has a clock. A SAFE that never converts simply sits — no date arrives, nothing comes due. A convertible note that never converts matures, and on the maturity date the company owes principal plus accrued interest to an investor who now holds creditor remedies against a company that raised a bridge precisely because it had no cash. Founders who chose the note for familiarity, then treated it like a SAFE and let the date pass unmanaged, have converted a financing instrument into an unpayable demand.

The reverse error is quieter: an investor who expected creditor protection signs a SAFE and holds neither debt nor stock — "it isn't stock until it converts into preferred shares" — with no maturity date on which anything is owed. Which instrument is right is a judgment about the round; that the two are not interchangeable is a fact about the documents.

Y Combinator's own summary of the trade is the last word on why the SAFE displaced the note in early rounds: the note's extra machinery is the cost, and where the debt features are not wanted the simpler instrument is faster to agree and sign.

Nobody wants to manage signing across several tools. Upload a PDF or Word file, or choose a reusable PDF form; ask cited questions, prepare fields, send it for signatures, and keep the result in one account.

Anyone can check a sealed file with no account.

Fifty sends a calendar month on the paid plan, and every one of them seals.