What actually happens to your cap table when you sign a SAFE versus a convertible note.
Startup Fundraising Glossary: SAFEs, Term Sheets & Cap Tables Explained
A founder's glossary covering SAFEs, convertible notes, valuation caps, discount rates, and how each shows up on the cap table.
Early-stage fundraising runs on a handful of instruments and terms that repeat across every deal. This glossary breaks down the ones that actually change your cap table.
The instruments
SAFE (Simple Agreement for Future Equity) — Created by Y Combinator in 2013, a SAFE is an equity agreement, not debt: no interest accrual, no maturity date. It converts into equity at a future priced round or exit.
Convertible note — A hybrid debt/equity instrument that appears as a liability on the balance sheet, accrues interest, and carries a maturity date, typically 18-36 months after signing. Unpaid interest converts into extra equity alongside the principal.
Priced round — A financing round where shares are sold at an explicit, negotiated valuation, as opposed to a SAFE or note where valuation is deferred.
Term sheet — A non-binding document outlining the key terms of an investment before definitive legal agreements are drafted.
The terms that matter
Valuation cap — The maximum company valuation at which a SAFE or note converts into equity, protecting early investors from dilution if valuation jumps before conversion.
Discount rate — A percentage discount early investors get on the price per share paid by later, priced-round investors, typically 10-20%.
Cap table (capitalization table) — The ledger of who owns what percentage of a company, across founders, employees, and investors, updated at each priced round or conversion event.
Dilution — The reduction in existing shareholders' ownership percentage that occurs whenever new shares are issued.
Pro-rata rights — An investor's right to participate in future rounds to maintain their existing ownership percentage.
Why this matters at pre-seed
Carta's market data shows SAFEs winning roughly 9-to-1 over convertible notes at the pre-seed stage, largely because they're cheaper to paper and don't carry a maturity date that forces a conversion event.
Sources
Wall Street Prep: SAFE Note Definition, CRV: SAFE vs. Convertible Note Founder's Guide.
Frequently asked questions
No — a SAFE is a right to receive future equity, not equity itself, so it typically doesn't appear as shares on the cap table until it converts at the next priced round.
A SAFE is equity with no interest, no maturity date, and simpler paperwork; a convertible note is debt, accrues interest, sits on the balance sheet as a liability, and has a maturity date, usually 18-36 months out.
It sets the maximum valuation at which an investor's money converts into equity, protecting early investors from being diluted if the company's value jumps sharply before the next priced round.