- Convertible securities: Comparing convertible notes vs. SAFEs
- What are convertible securities?
- How do convertible securities work?
- Types of convertible securities
- What is a convertible note?
- What is a Simple Agreement for Future Equity (SAFE)?
- Key convertible security terms you need to know
- SAFEs vs. convertible notes
- Pros and cons of convertible securities
- Advantages of convertibles
- Disadvantages of convertibles
- How convertible securities impact your cap table
- Modeling the conversion and dilution
- Managing your convertible round with confidence
- Frequently asked questions about convertible securities
When you’re seeking startup funding, don’t assume you’ll need to offer up preferred stock right away in exchange for capital. That’s one option, but there are other types of investment structures, known as convertible securities, that you can offer to investors.
While the financial world includes many types of convertible securities, early-stage founders will almost exclusively encounter two: convertible notes and SAFEs.
What are convertible securities?
Convertible securities, also called convertible instruments or convertibles, are financial instruments that let you raise money now in exchange for a promise of equity or ownership in a company at a later date. For early-stage startups, these instruments are common in startup financing, popular with angel investors, institutional seed funds, and founders who want to get moving without a lengthy negotiation. Many founders and investors turn to convertibles because they’re typically faster, cheaper, and more flexible than raising capital via a priced round. Convertible notes and SAFEs (Simple Agreements for Future Equity) are the two most common types of convertible securities startups use.
Convertible securities allow founders to raise capital without having to set a firm valuation right away. Early-stage startups typically haven't raised a priced round yet, so no market-set valuation exists. Convertibles give you the runway to reach meaningful milestones, like developing your product or signing your first customers, before that conversation is necessary.
How do convertible securities work?
The mechanics of convertibles are designed for speed. An investor provides cash to your startup now, and that investment converts into company stock during a future financing event. This conversion will usually occur in conjunction with the next preferred stock financing, or priced round: the equity financing round where shares are issued at a formally negotiated valuation.
In some instances, such as the company getting acquired before the convertible converts, the investor could receive a cash payout instead of equity.
Types of convertible securities
Understanding these two common forms will prepare you for most pre-seed and seed fundraising conversations you will have with potential investors. The following sections will break down each one so you can understand their core differences and decide which is right for you.
What is a convertible note?
A convertible note is a debt instrument that can convert into equity upon a future qualifying event or transaction, such as a priced equity round. A form of convertible debt, it is essentially a loan from an investor that you agree to repay with company equity, rather than with cash. As the issuer, your company carries the note as a liability on your balance sheet until it either converts or is repaid. Convertible notes come with two debt-like features: an interest rate and a maturity date (when the note expires). Unlike a traditional loan, interest doesn't drain your cash flow: It accrues and converts alongside the principal amount at the qualifying event. If the note hasn’t already been converted into equity by the maturity date, the company must repay the noteholder’s principal investment plus interest.
For example, if an investor provides $100,000 at an 8% interest rate on a note with a one-year maturity, the company would pay the investor back $108,000 at the one-year mark if it has not yet raised a priced round and thus cannot convert the debt to equity.
However, if both parties want to extend the maturity date, they can amend the note. Until the note either converts into equity or is repaid by the company, the note will continue to accrue interest.
Convertible notes often include a valuation cap, a conversion discount, or both. These features enable convertible noteholders to convert their shares to equity at a lower price than that paid by later investors, rewarding them for taking a chance at the earliest stages. If a convertible note has both a valuation cap and a conversion discount, the investor typically at whichever gives the lowest conversion price per share.
What is a Simple Agreement for Future Equity (SAFE)?
SAFE stands for Simple Agreement for Future Equity. Sometimes called SAFE notes, SAFEs have become the most common convertible instrument due to their relative simplicity. In Q1 2026, SAFEs accounted for 93% of pre-seed rounds on Carta, making them the dominant early-stage fundraising instrument. Like convertible notes, SAFEs convert into stock in a future priced round. Unlike convertible notes, they are not debt and do not require the company to pay back the investment with interest.
SAFEs can be pre-money or post-money. Post-money SAFEs base conversion on the company’s capitalization immediately prior to the priced round (including any additional financing that came in after that particular SAFE). Pre-money SAFEs convert based on the company’s capitalization at the time of the SAFE investor’s initial investment. A post-money SAFE provides more certainty to investors about their ownership percentage going into the priced round, whereas a pre-money SAFE investor may be diluted by future investments before the priced round.
SAFEs typically come with a valuation cap, a conversion discount, or both. Unlike convertible notes, which usually require the company to raise a certain amount of capital for automatic conversion into equity, SAFEs typically convert at any dollar amount the company raises during the next preferred stock round.
Key convertible security terms you need to know
The legal agreements for these instruments can feel intimidating, but they revolve around a few core concepts. Knowing them before you sign protects you from surprises down the road.
Valuation cap: This sets a maximum valuation (for the purpose of determining the price per share) at which an investor’s money converts into equity at the next priced round—typically expressed as a pre-money valuation for convertible notes, or a post-money valuation for post-money SAFEs. This incentive is designed to reward early investors by keeping the conversion price down if a company’s valuation grows quickly, ensuring they get a favorable price compared to later investors.
Conversion discount: This gives investors a discount on the price per share compared to other investors in the same priced round when their convertible note converts into equity. For example, convertible note investors might have the right to have their investment converted into shares at a 20% discount to the price paid by later investors.
Maturity date and interest rate: These terms only apply to convertible notes. The maturity date creates a repayment deadline that can add pressure to raise another round, while the interest rate increases the total amount that will convert into equity, further diluting existing shareholders and impacting qualified small business stock (QSBS) eligibility.
Liquidation preference: When a convertible instrument converts into preferred stock, that stock typically carries a liquidation preference, which is a right for investors to recoup their investment before common stockholders in a sale or dissolution. Understanding this matters when modeling acquisition scenarios.
SAFEs vs. convertible notes
Choosing between a SAFE and a convertible note depends on the specifics of your fundraising situation and what investors in your network expect. Here’s how convertible notes and SAFEs compare:
Feature | Convertible Notes | SAFEs |
Type of instrument | Debt | Equity |
Valuation cap | ✅ | ✅ |
Conversion discount | ✅ | ✅ |
Maturity date | ✅ | ⛔ |
Accrues interest | ✅ | ⛔ |
SAFEs have become the standard for most early-stage investments because they're simpler and more founder-friendly. Without a repayment deadline or accumulating interest, founders can focus on building rather than managing debt.
Pros and cons of convertible securities
Convertible securities work well for founders who need capital quickly, but want to reach certain company milestones before doing a priced round. The flexibility that convertible securities offer comes with real tradeoffs, including dilution.
Advantages of convertibles
Fast and affordable: Fewer terms to negotiate means you spend less time and lower legal fees.
No fixed valuation: If you’re not sure how your company will grow, you have the time to develop appropriate metrics to measure your company’s value for the next round of funding.
Keeps control with the founders: You don't have to give up control yet. Raising via convertibles means deferring the governance commitments, like board seats and preferred stock voting rights, that come with a priced round.
Rolling closings: You can raise capital from several different investors over a period of time, instead of all at once. You don’t need a lead investor to drive the round.
Disadvantages of convertibles
Can cause unexpected dilution: If you raise too much in convertibles, or if they convert at particularly low valuations relative to your future priced round, they can dilute your ownership more than you might expect.
May still require an effective valuation: If you decide to put a valuation cap on a convertible note or SAFE, you’ll still need to negotiate a valuation proxy. That means you’re not avoiding the valuation discussion as much as you might think.
Can limit other investment opportunities: Without a clear lead to galvanize interest in your company, it may be difficult to secure other investments.
How convertible securities impact your cap table
The biggest challenge with convertible securities is managing their impact on your company's ownership structure: your cap table. Each convertible instrument you issue is a future claim on your company's equity. Without careful tracking, this can lead to what Carta calls spreadsheet chaos, which often results in costly errors and can jeopardize investor trust. These mistakes can have real financial consequences: If a valuation cap or discount rate is recorded incorrectly, the wrong number of shares may convert at your priced round—creating disputes with investors that are difficult and costly to unwind.
Tracking every instrument in one place keeps you, your team, and your investors aligned on ownership at every stage. A disorganized cap table creates real problems during due diligence.
Modeling the conversion and dilution
Before you raise your first priced round, you must model how all your outstanding convertibles will convert into equity using a SAFE and convertible note calculator. This process is the only way to understand what your ownership will look like after the financing and to negotiate effectively with new investors. You need to see the full picture of dilution before you sign a term sheet.
Relying on spreadsheets for this complex task is risky and prone to errors that can have major consequences. Carta's Scenario Modeling is a professional solution built for this purpose. It gives you the clarity and confidence to negotiate your next round, knowing exactly how it will impact your cap table and the ownership stakes of you, your team, and your early investors.
Managing your convertible round with confidence
Using a platform like Carta from day one ensures every SAFE is issued correctly, all signatures are collected via Carta Launch, and every instrument is tracked on a clean, investor-ready cap table. That foundation eliminates the administrative burden so you can focus on building.
For example, 1up relied on Carta to manage its cap table and issue its SAFEs, which positioned it for a new funding round and international expansion. The founders of SolarMente managed their SAFEs on Carta and were able to move quickly when new opportunities came up.
For founders just getting started, Carta Launch offers a free and simple way to begin on a professional platform. It provides the tools to manage equity correctly from day one. Request a demo to see how Carta can support your fundraising journey.
Frequently asked questions about convertible securities
Here are answers to some of the most common questions founders have about convertible securities.
What happens if a SAFE or convertible note doesn't convert?
For a SAFE, the instrument simply remains outstanding until a conversion event occurs, such as an acquisition or other liquidity events. For a convertible note, the company is typically obligated to repay the principal amount plus interest at the maturity date, unless the terms are renegotiated with the investor.
Can you have multiple SAFEs with different terms?
Yes, it is common for startups to issue multiple SAFEs with different valuation caps or discounts to different investors. This is also why manual tracking is so risky: It becomes difficult to manage the various terms accurately without a dedicated platform.
Do convertible securities give investors voting rights?
No. Investors receive voting rights only after the instrument converts into equity during a priced round. Convertible instruments typically convert into preferred stock rather than common stock so investors receive the voting rights associated with the specific share class they receive.
What is a post-money SAFE vs. a pre-money SAFE?
A post-money SAFE calculates ownership based on the company's capitalization after all convertible instruments in that round are accounted for, giving the investor more certainty about their ownership percentage. Post-money SAFEs are now the standard in early-stage fundraising because they provide more clarity for both founders and investors.
Is a convertible note a good investment for early-stage investors?
For an investor, a convertible note can be a great way to get into a promising company early with favorable terms that reward their risk. For a founder, it's a useful tool to secure capital quickly without having to set a valuation right away.
What are the tax implications of issuing a convertible note?
Because a convertible note is initially structured as debt, it generally does not trigger immediate tax consequences for the company or the investor upon issuance. Always consult a tax professional about the implications specific to your situation.
How does a convertible note convert into equity during a priced round?
When a priced round occurs, the note's principal amount and any accrued interest are divided by the conversion price, which is determined by the valuation cap or discount. This calculation determines the number of shares the noteholder receives, a process that platforms like Carta automate to ensure accuracy.
Can I use a convertible note for a Series A?
Convertible notes are most common at pre-seed and seed stage; by Series A, most companies raise a priced round instead. Series A investors typically expect a fully negotiated priced round rather than convertible instruments, though a company may have outstanding notes that convert automatically as part of a Series A close.
Do convertible notes accrue interest?
Yes. Convertible notes accrue interest like a traditional loan at a rate set in the note. That interest isn't paid in cash; instead, it adds to the total amount that converts into equity at the qualifying round, slightly increasing investor ownership.
How do convertible notes affect dilution?
Convertible notes defer pricing, but not dilution. The ownership impact becomes real at conversion. Because the note converts at a discount or at the cap-implied price, early investors receive more shares per dollar than new investors in the priced round.
When do convertible notes convert into equity?
Most convertible notes convert automatically when the company closes a qualified financing round, typically a priced equity round, that meets a minimum dollar threshold set in the note agreement. Other conversion triggers include a company acquisition or an IPO.
What happens if a convertible note reaches its maturity date?
If no qualifying financing round has occurred by the maturity date, founders and investors typically negotiate one of three outcomes: extending the maturity date, converting the note into equity at the valuation cap, or repaying the principal plus accrued interest in cash. If the company cannot repay and has no clear path to conversion, bankruptcy becomes a risk for both parties, which is why choosing a realistic maturity timeline matters.
DISCLOSURE: This communication is on behalf of eShares, Inc. dba Carta, Inc. ("Carta"). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2026 Carta. All rights reserved. Reproduction prohibited.
