Understanding SAFE notes vs convertible notes (CLNs)

As an early-stage founder in the UK, raising capital isn’t an easy feat. While you need funding to build and grow your business, pushing for a priced round too early can expose you to excessive dilution.

This is where funding options like SAFEs and Convertible Loan Notes come in. Both instruments are designed to solve the same core problem: how to raise capital now while postponing valuation and long-term equity decisions until your business is stronger.

This guide walks you through SAFE notes and convertible notes and explains how they differ.

If you are looking to secure funding from international investors, we’ll also explain why opening a Wise Business account could be a great idea.

Get started with Wise Business ✍️

The contents of this article is for informational purposes only and does not constitute legal or tax advice. Decisions related to tax should be made after thorough research, consultation and verification from a qualified financial and legal advisor.

What is a SAFE note? (Simple Agreement for Future Equity)

SAFE Note is an investment arrangement whereby investors provide funding to startups in exchange for the right to convert their investment into equity at a future date. It is not a loan and doesn’t create debt for your company. Instead, a SAFE note gives your investors the right to convert their investment equity in the future. This conversion typically happens when your startup raises a priced equity round.

SAFE Note was created by a YC partner and lawyer, Carolynn Levy, as an alternative to convertible notes in 2013¹. Its sole aim is to provide a simple alternative to convertible loan notes for early-stage funding. Over the years, SAFE Note has become a more popular investment instrument because it’s simple. It has fewer moving parts, meaning there is no interest accrual, repayment schedule, or maturity date to worry about.

Compared to convertible loan notes, SAFEs can be a preferred option for early-stage startups. Since it’s not a loan, there are no accrued interests, and you don’t need to incur debt.

When an investor contributes to your startup through SAFE, they are not buying shares right away. Instead, they are funding your startup with the clause that their SAFE will convert into shares in the future. This conversion is usually triggered whenever your startup raises a priced equity round.

Once this happens, your investors' SAFE turns into shares of preferred stock. These shares convert on favourable terms, meaning SAFE investors receive a discount or a valuation cap, so they pay more per share than new investors in that round.

What is a convertible loan note? (CLN)

A convertible loan note is a type of debt financing in which an investor lends your startup money in exchange for a promissory note that converts into equity at a later date. Also known as convertible promissory notes, this funding option helps startups secure financing during their early stages.

The investor provides funding as a short-term loan, and instead of repaying the principal and interest in cash, the principal and interest convert into equity. The conversion occurs when a triggering event (such as a priced funding round or, in some cases, the note's maturity date) occurs.

Convertible notes can be a great fit when your startup is still early. You may be building your product, testing the market, or generating early traction, but not yet in a position to raise a full venture capital round. A convertible note helps you raise capital now for your startup while postponing valuation discussions until your business has more proof and momentum.

Convertible notes are similar to equity in one way. Both give investors ownership in your company. The difference is in the level of control.

With a traditional equity investment, investors may receive voting rights or even a board seat. With a convertible note, investors typically don’t gain that level of control upfront, allowing you to retain decision-making authority while you grow the business.

Overall, they can be a win-win arrangement for both you, the founder, and your investors. As a founder, you get the capital you need without immediately giving up control of your startup or negotiating a valuation too early. In return, your investors are rewarded for taking early risk through conversion discounts and valuation caps, which let them convert their investment into shares at a more favourable price than later investors.

An example of a convertible note

Let’s say your tech startup raises £50,000 from an early investor using a convertible note. Instead of buying shares immediately, the investor is lending the company money, expecting it to be converted into equity later.

The key terms of the note are:

• 10% interest rate
• 2-year maturity date
• £4 million valuation cap, i.e, the maximum valuation used when the loan converts
• 20% conversion discount

If the company raises a funding round within 2 years, the convertible note automatically converts into equity. Instead of converting at the same price as new investors, your early investor gets a better deal.

The investor’s £50,000 plus the interest it’s earned can be converted using whichever option is more favourable to them:

• The £4 million valuation cap, or
• The 20% discount on the new round’s share price

Either way, the investor ends up with more shares than someone who invested later at the same cash amount.

Note: If two years pass and the startup hasn’t raised a priced round, the investor may either request repayment or agree to extend the note's maturity date.

Which is right for your startup?

When it comes to choosing between SAFE notes and convertible notes, there’s no single “right” option for every startup.

Each funding option is suited for different startups at different stages. SAFE notes are typically more founder-friendly. It’s also fast, simple, and has no debt obligations, making it more suited for early-stage startups.

Alternatively, convertible notes offer greater structure through interest and maturity dates, which can appeal to investors seeking more explicit protections and timelines.

Here’s a quick walkthrough of how both SAFE notes and convertible notes are ideal for different scenarios:

SAFE notes

SAFE notes might be more suitable for you if you are:

• Early-stage startups: This funding option is best suited to startups in the seed or pre-seed stage. It provides a fast, simple, and founder-friendly way to raise capital. As a founder in the early stages, you can raise funding quickly while avoiding the complex negotiations and valuation terms that come with raising an equity funding round.
• Founders raising small to medium rounds: SAFE notes are ideal for startups raising fundsfrom angels, accelerators, or seed funds that are already comfortable with founder-friendly structures. Unlike Convertible notes, SAFEs don’t accrue interest and don’t have maturity dates, which reduces financial pressure on your startup.
• Founders looking for a streamlined fundraising process: Raising funds through SAFE notes is straightforward and far less complex than a traditional equity round. This makes them a great option for startups that want to close funding quickly while keeping legal costs and negotiations to a minimum.
• Uncertain about your startup valuation: Instead of forcing you and your investors to agree on a number before the business has fully taken shape, a SAFE allows you to push that decision to a future funding round. That way, you can focus on building and gaining traction now, while leaving valuation discussions for a point when there’s more data to support it.

Convertible notes

Convertible notes might be ideal for you if you are:

• Founders raising larger early-stage rounds: For founders seeking larger amounts, convertible notes are more suitable. It can support larger checks by offering valuation caps, discounts, and interest without forcing you into a priced equity round too early.
• Founders with early traction but not enough to price the company: If you’ve launched a product, signed early customers, or proven demand, but still lack enough data for a confident valuation, a convertible note gives you breathing room. It allows you to raise now and convert later, once your traction supports stronger pricing.

As a startup, minimising costs is one way to make your business profitable. You can open a Wise Business account for £50 (Advanced plan) or for free (Essentials plan), offering you transfers at mid market exchange rates in over 40+ currencies.

Receive startup funding easily with Wise Business

Choosing between SAFE notes and convertible loan notes ultimately comes down to your startup’s timing, traction, and investor expectations.

Once you’ve decided on the right funding structure, having the right financial setup makes it much easier to receive and manage those funds, especially if you’re raising funds from international investors.

With a Wise Business account, you can hold and exchange 40+ currencies in one place, send payments to global-claim-send-to-countries countries, and receive money using local account details in 8+ currencies, just like a local business.

When you open a Wise Business account, you get:

• International payments at the mid-market exchange rate
• One account designed to manage multiple currencies
• Local account details in major currencies to receive payments like a local business (only with Wise Business Advanced)
• Access to hold and exchange over 40+ currencies
• Open an account for £50 (Advanced plan) or for free (Essentials plan), depending on your setup

Opening a Wise Business account is quick and fully digital, with straightforward verification and onboarding. You can review the requirements and get started online in just a few steps.

Register for Wise Business 💼

*Disclaimer: The UK Wise Business pricing structure is changing with effect from 26/11/2025 date. Receiving money, direct debits and getting paid features are not available with the Essential Plan which you can open for free. Pay a one-time set up fee of £50 to unlock Advanced features including account details to receive payments in 22+ currencies or 8+ currencies for non-swift payments. You’ll also get access to our invoice generating tool, payment links, QuickPay QR codes and the ability to set up direct debits all within one account. Please check our website for the latest pricing information.

Frequently asked questions

Here are some frequently asked questions on SAFE notes and convertible notes:

What is the main difference between a SAFE and a Convertible Note?

The main difference between a SAFE and a convertible note is how they’re structured. A convertible note is a loan that accrues interest, has a maturity date, and may need to be repaid if it doesn’t convert into equity. A SAFE, on the other hand, is not debt and doesn’t come with interest or a repayment timeline.

Is a SAFE note considered equity or debt?

A SAFE note is neither equity nor debt. It’s a contractual right to receive equity in the future, usually when the company raises a priced funding round or experiences another qualifying event.

Is a SAFE note considered equity or debt?

A SAFE note is neither equity nor debt. It’s a contractual right to receive equity in the future, usually when the company raises a priced funding round or experiences another qualifying event.

What happens if there is no qualifying round for my SAFE or convertible note?

If there is no qualifying financing or exit event, a SAFE remains outstanding. It doesn’t have a maturity date, so it doesn’t need to be repaid.

A convertible note, on the other hand, has a maturity date. So, the investor may demand repayment or renegotiate terms when it is maturity date.

What key terms should founders review before signing?

For SAFE notes, look out for the discount rate, valuation cap, trigger event, and investor rights (for SAFEs where this is negotiated).

For convertible notes, you should pay close attention to the interest rate, maturity date, valuation cap, discount, and trigger event.

Sources used:

1. [https://www.ycombinator.com/blog/announcing-the-safe-a-replacement-for-convertible-notes/](https://www.ycombinator.com/blog/announcing-the-safe-a-replacement-for-convertible-notes/

Sources last checked: 19/12/2025