SAFE vs. Convertible Note vs. Equity Capital Raise

For any early-stage founder, reaching the point where your idea has gained enough traction to require outside capital is a pivotal milestone. However, navigating the landscape of fundraising can be bewildering, with various investment structures available to accelerate growth. At Henson Venture Partners, we believe that venture capital isn't just about vision—it’s about velocity and strategic growth. Choosing the right investment instrument is the first step in ensuring your company stays focused, aligned, and fundable.

When raising capital, you generally have three main paths: SAFE notes, convertible notes, or a priced equity round. Below, we break down these options to help you determine the best fit for your startup's stage and goals.

1. The Simple Agreement for Future Equity (SAFE)

A SAFE is a financial instrument that represents a promise of future equity in exchange for capital today. It is often considered a founder-friendly option because it is not debt.

• How it Works: SAFEs convert into stock during a future priced funding round or an IPO. Unlike debt, they do not require the company to pay back the investment with interest.

• Key Features: They have no maturity dates and no interest rates, which reduces financial burdens on the startup. They typically include a valuation cap or a conversion discount to reward early risk-takers.

• Best For: Early-stage startups in the pre-seed or seed stage that need to close funding quickly with standardized terms.

2. Convertible Notes (Convertible Debt)

A convertible note is a type of short-term debt that can convert into equity upon a future qualifying event, such as a priced equity round raised from venture capital investors.

• How it Works: As a debt instrument, it carries an interest rate (typically 4–8%) and a maturity date (often 12–24 months). If the startup fails to raise a priced round by the maturity date, investors can technically demand repayment of the principal plus interest.

• Key Features: Like SAFEs, they usually include valuation caps and conversion discounts. Interest on these notes is often tax deductible for the company but is taxed as ordinary income for the investor.

• Best For: Founders who want to "sweeten the deal" for investors who prefer the added security and leverage of a debt instrument.

3. Priced Equity Rounds

A priced equity round is a traditional form of fundraising where you sell newly issued shares at a negotiated, fixed valuation.

• How it Works: Unlike "convertibles" that defer the valuation conversation, a priced round requires setting the company’s worth upfront.

• Key Features: Investors receive immediate equity and often gain governance rights, such as board seats and voting rights. These rounds help attract serious institutional venture capital firms.

• Best For: More established startups ready to scale, typically at the Series A stage and beyond. These rounds are significantly more expensive and time-consuming due to high legal and due diligence costs.

Comparison at a Glance

Feature	SAFE	Convertible Note	Priced Equity
Type	Contract (Not Debt)	Debt (Loan)	Equity
Interest Rate	None	Typically 4–8%	N/A
Maturity Date	None	Yes (12–24 months)	N/A
Valuation	Deferred	Deferred	Set Upfront
Speed	Very Fast	Fast	Slow

The Henson Venture Partners Perspective

At Henson Venture Partners, we’ve found that one of the most powerful strategies during any raise is maintaining momentum. Whether you choose a SAFE or a note, consistent monthly investor updates build the trust and transparency necessary to position you as a founder who executes.

Key Takeaways for Founders:

• Don't build too soon: Before raising significant capital, ensure you have validated demand with real customers to avoid failing from premature scaling.

• Watch for Dilution: Raising too much via convertibles at low valuation caps can lead to unexpected dilution when they eventually convert into equity.

• Focus on Velocity: VCs expect a clear growth trajectory, often tripling revenue in Seed and Series A rounds. Choose the instrument that gives you the capital to hit those milestones without unnecessary financial pressure.

The Verdict: Fundraising is a milestone, not the finish line. Choose the path that aligns with your startup's stage and investor expectations, then stay focused on the long game of building a great company.

Analogy: Think of a SAFE as a "save the date" for a future party where the guest hasn't bought their gift yet, while a Convertible Note is a loan for the party supplies that must be settled with interest if the party doesn't happen on time.